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Exam 15: Business Alliances: Joint Ventures, partnerships, strategic Alliances, and Licensing

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Question 41

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Major motivations for business alliances include risk sharing as well as gaining access to new markets and skills.

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B) False

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Question 42

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How ownership interests will be transferred in a business alliance is a relatively unimportant deal structuring issue.

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Question 43

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Antitrust regulatory authorities tend to look most favorably on which type of alliances?

The formation of a successful alliance requires that a series of issues be resolved before signing an alliance agreement.

Which of the following is not a typical question that must be addressed in defining scope?

Which of the following is generally true about financing JVs and partnerships?

GENERAL MOTORS BUYS 20% OF SUBARU In late 1999, General Motors (GM), the world's largest auto manufacturer, agreed to purchase 20% of Japan's Fuji Heavy Industries, Ltd., the manufacturer of Subaru vehicles, for $1.4 billion. GM's objective is to accelerate GM's push into Asia. The investment gives GM an interest in an auto manufacturer known for four-wheel drive vehicles. In combination with its current holdings, GM now has a position in every segment of Japan's auto market, including minivans, small and midsize cars, and trucks. GM already owns 10% of Suzuki Motor Corporation and 49% of Isuzu Motors Ltd. GM can now expand in Asia more quickly and at a lower cost than if it developed products independently. GM has been collaborating with Fuji on various products since 1995. The move underscores GM's commitment to expanding its current modest position in the Asian market, which is expected to be the fastest growing market during the next decade. GM has sold less than 500,000 in the Asia-Pacific region in 1999, including about 60,000 in Japan. In 2002, GM bought the remaining outstanding stock of Subaru. : -Why do you believe that General Motors may have wanted to limit initially its investment to 20%?

A corporate legal structure is seldom used in implementing business alliances,because it may be subject to double taxation and significant set up costs.

The success rate among business alliances is usually much higher than for mergers and acquisitions.

Strategic alliances generally create separate legal entities in order to achieve their business objectives.

Autos R Us and Pre-owned Inc represent used car dealers that compete in the same city.These competitors each invest $15 million to form a new,jointly owned company,Real Value Inc,that will sell cars in a nearby city.The new firm is best described by which of the following terms:

Joint ventures sometimes represent good alternatives to an outright merger.

Companies wishing to do business abroad often enter into an alliance with an indigenous company to facilitate entry into a foreign market.The foreign company is usually the majority owner in such relationships.

Strains Threaten Verizon and Vodafone Joint Venture Vodafone Group, the U.K. based cell phone behemoth wanted to expand geographic coverage in the U.S. In 2000, they teamed up with Verizon Communications to form Verizon Wireless. The profitable business had annual revenues of $20 billion and a coast-to-coast network serving more U.S. customers than any other carrier. However, Vodafone's global ambitions and its buy-out option threatened to put the venture at risk of breaking up. Vodafone executives expressed frustration by the company's lack of control in the U.S., because it owns just 45 percent of the venture. Vodafone seeking to establish its own brand name has been unable to get its name attached to a single product of the joint venture. Moreover, it has been unable to persuade the venture to use a technology compatible with that used by Vodafone in most of the 28 other countries in which it does business. This issue has proven to be particularly irksome since part of the Vodafone strategy is that its European, Asian, and Middle Eastern customers would be able to travel to the U.S. and use their cell phones on Vodafone's network in the U.S. Vodafone also complains that Verizon Wireless has been slow to push next-generation wireless services such as photo and text messaging. Verizon Wireless also receives three times as many customer complaints as the average of Vodafone European units. Vodafone is reduced to be a passive financial investor in the operation. The two partners are also at odds in their strategies for owning wireless assets. Verizon Communications increasingly uses the venture to support its declining land-line telephone business, by bundling wireless at a discount with other services. Vodafone considers landlines as having no future for its strategy. The cloud hanging over Verizon Wireless is the put that Vodafone received as part of its initial investment which gives it the right to sell its interests to Verizon at certain points through 2006. Vodafone can demand that Verizon pay it $10 billion in return for its stake. Mindful of the put, the partners have discussed friendlier ways to alter their relationship. For example, Vodafone could swap part of its stake in the venture for Verizon Communications' interest in Italian wireless operation Omnitel. Anything that reduced Vodafone's interest in Verizon Wireless below 20 percent would free Vodafone from a non-compete clause that precludes the firm from opening up its own operation in the U.S. : -Give examples of how the partners' objectives differ.

The automotive industry rarely uses alliances to provide additional production capacity,distribution outlets,technology development,and parts supply.

The life of the LLC is determined by the owners and is generally set for a fixed number of years in contrast to the typical unlimited life for a corporation.

Unlike other legal forms,the C corporate structure has an indefinite life as it does not have to be dissolved as a result of the death of the owners or if one of the owners wishes to liquidate their ownership position.

Foreign companies having a minority ownership position in international business alliances rarely have control over the alliance even though they may possess much of the expertise required to manage the alliance.

Microsoft Partners with Yahoo!-An Alternative to Takeover? Business alliances sometimes represent a less expensive alternative to mergers and acquisitions. This notion may have motivated Microsoft when the firm first approached Yahoo! about a potential partnership in November 2006 and again in mid-2007. Frustrated with their inability to partner with Yahoo!, Microsoft initiated a hostile takeover bid in 2008 valued at almost $48 billion or $33 per share, only to be spurned by Yahoo!. Following the withdrawal of Microsoft's offer, Yahoo!'s share price fell into the low to mid-teens and remained in that range throughout 2010. Reflecting the slumping share price and a failed effort to create a search partnership with Google, Yahoo!'s cofounder, Jerry Yang, was replaced by Carol Bartz in early 2009. The U.S. Justice Department had threatened to sue to block the proposed partnership between Yahoo! and Google on antitrust grounds. Microsoft again approached Yahoo! with a partnering proposal in mid-2009, which resulted in an announcement on February 18, 2010, of an Internet search agreement between the two firms. As a result of the agreement, Yahoo! transferred control of its Internet search technology to Microsoft. Microsoft is relying on a ten-year arrangement with Yahoo! to help counter the dominance of Google in the Internet search market. By gaining access to each other's Internet users, both firms hope to be able to attract more advertising dollars from companies willing to pay for links on Microsoft's and Yahoo!'s websites. With Microsoft's search technology believed to be superior to Yahoo!'s, users requesting searches through Yahoo!'s site will be implemented using Microsoft's search software. Regulatory agencies in both the United States and the European Union had no trouble approving the proposal because the combined Yahoo! and Microsoft Internet search market share is dwarfed by Google's. Google is estimated to have about two-thirds of the search market, followed by Yahoo! at 7% and Microsoft with about 3%. Yahoo! could profit handsomely from the deal, since it will retain 88% of the revenue from search ads on its website during the first five years of the ten-year contract. Microsoft will pay for most of the costs of implementing the partnership by giving Yahoo! $150 million to defray its expenses. Microsoft also agreed to absorb about 400 of Yahoo!'s nearly 14,000 employees. Ironically, Microsoft may get much of what it wanted (namely Yahoo!'s user base) at a fraction of the cost it would have paid to acquire the entire company. Garmin Utilizes Supply Agreement as Alternative to Acquiring Tele Atlas Following an aggressive bidding process, Garmin Ltd., the largest U.S. maker of car-navigation devices, withdrew its bid for the Netherlands-based Tele Atlas NV on November 16, 2007. Tele Atlas provides maps of 12 million miles of roads in 200 countries. The move cleared the way for TomTom NV to buy the mapmaker for $4.25 billion. Both Garmin and TomTom are leading manufacturers of global positioning systems (GPSs), which enable users to navigate more easily through unfamiliar territory. The most critical component of such navigation systems is the map. In lieu of acquiring Tele Atlas, Garmin entered into a six-year deal with an option to extend for an additional four years to obtain maps from Tele Atlas's competitor Navteq Corp. In doing so, Garmin avoided the EPS-dilutive effects of owning money-losing Tele Atlas. Garmin can focus on building traffic information and business listings into its products without having to own the underlying maps. An acquisition would have diluted Garmin's profit until 2010. Building maps comparable to those owned by Tele Atlas could take up to 10 years and cost $1 billion. By owning the maps, TomTom is seeking to become more of a service provider than simply a manufacturer of GPS devices. Such devices are widely used in the automotive industry, as well as aviation and boating. The biggest growth opportunity is the increased use of GPS tracking capabilities in the market for mobile phones. This application is expected to dwarf the transportation and sports markets for GPS devices. Because it will own the underlying maps, TomTom may be able to more easily combine the data with navigation devices and add traffic, gas station, and restaurant information. In contrast, Garmin will have to obtain proprietary data from others. Garmin may also have to pay more for maps or even lose access after the contract (including the option to extend) expires. : -Describe the disadvantages of the supply agreement to Garmin?

In terms of important deal structuring issues,scope outlines how broadly the alliance will be applied in pursuing its purpose.