Nilesh Surana 10DM - 095

Introduction Resources & Synergies

Types of Synergies Nature of Resources Extent of Redundant Resources

Market Factors Collaboration Capabilities Cisco: An acquisitions-led growth strategy

An alliance is an agreement between businesses, usually motivated by cost reduction and improved service for the customer. Alliances are often bounded by a single agreement with equitable risk and opportunity share for all parties involved and are typically managed by an integrated project team. An acquisition is the purchase of one business or company by another company or other business entity. Most acquisitions & alliances fail. Why? Companies simply dont compare the 2 strategies before picking one Alliances & acquisitions are alternative strategies that is, the decision to do one usually implies not doing the other.

Companies must analyze 3 factors: Resources & synergies they desire Marketplace they compete in Competencies at collaborating

 Coca Cola and P&G created a $4 billion joint venture in Feb,2001. Agreement Terms Coke would transfer Minute Maid , Sonfil, Cappy, Qoo etc. to the new company and P&G would contribute two beverage brands - Punica, Sunny delight and Pringles chips. Coke would tap P&Gs nutritional expertise to develop new drinks and P&Gs flagging brands would get a boost from Cokes extensive distribution network.

Aim: The new venture would slash costs by $50 million.

Consequences Cokes stock dropped by 6% and P& Gs Stock rose by 2%. Investors wondered why Coke had agreed to share 50% of the profits from a fast growing segment with a weak rival & that too in its core business. The alliance was terminated within 5 months.

Companies team up to profit from the synergies they can generate by combining resources. Resources: human resources, intangibles (brand names), technological resources (patents), physical resources (distribution networks), financial resources Synergies: created by combining customizing resources differently. and

1. Modular Synergies Managing resources independently and pooling only the results for greater profits.

Non-equity alliances are best suited to generate modular synergies E.g. HP and Microsoft pool the systems integration and enterprise software skills respectively to create technological solutions

2. Sequential Synergies

One company completes its tasks and passes on the results to its partner to do its bit. Resources are sequentially independent. Equity based alliances E.g. When a biotech firm that specializes in discovering new drugs say, Abgenix, wishes to work with a pharmaceutical giant say, AstraZeneca that is familiar with FDA approvals are seeking sequential synergies.

3. Reciprocal Synergies

By working closely together and executing task through an iterative knowledge sharing process. Combine and customize resources to make them reciprocally interdependent.

Acquisitions are better than alliances for the companies that desire reciprocal synergies.
E.g. Exxon and Mobil realized that they have to become more efficient in almost every art of the value chain, be it research, oil exploration or marketing. Thus they decided to merge rather than pursuing an alliance.

Resources are of two kinds: a. Hard Resources b. Soft Resources Hard resources - Acquisition because their valuation is easy & synergies can be quickly generated. Human Resources Avoid Acquisitions employees tend to become unproductive. , because in acquisitions

For instance Bank-America picked up Montgomery Securities, key employees headed for the door, Bank-America never benefited from the acquisition. Equity alliances are better bets where people are involved allows company to control the actions of their partners, monitor performance & align the interest of two firms more closely.

Estimate the amount of redundant resources.

Use the surplus resources to generate economies of scale, or cut costs by eliminating resources.
Large amount of redundant resources - Opt for Acquisitions or Mergers. For instance: Drivers behind Hewlett Packard & Compaq merger are : Resource Redundancy. Aim to generate $2 billion of savings in fiscal 2003. Eliminate redundancies across value chain

Degree of Uncertainty

Evaluate the low/high/moderate product discussed.

degree associated

of with

uncertaintytechnology or

Technology must be superior to existing or potential rivals. Assess if consumers will use the technology/product and how much time will it take to gain acceptance.

If the outcome is highly or moderately uncertain Non equity or equity alliance rather than acquisition.

Competition

Wise to check if there are rivals for potential partners. Avoid takeovers when business uncertainty is high. Instead, negotiate an alliance that will let the company acquire a majority stake at a future date when uncertainty reduces. For instance, Pfizer used alliance with Warner Lambert in the marketing of Lipitor as gateway to acquisition.

A company's experience in managing acquisitions or alliances is bound to influence its choices. Companies have learnt the dos and don'ts from experience and created templates that help executives manage specific acquisition or alliancerelated tasks. Companies have developed formal and informal training programs that sharpen managers' deal-related skills. GE Capital, Symantec, and Bank One have created acquisition competencies, while Hewlett-Packard, Siebel, and Eli Lilly have systematically built alliance capabilities. Since most firms have developed either alliance or acquisition skills, they often become committed to what they're good at. They stick to pet strategies even if they aren't appropriate and make poor choices.

Dual growth strategy Acquired and successfully absorbed 36 firms Entered into more than 100 alliances Between 1993 and 2003, the companys sales and market capitalization grew by an average of 36% and 44%, respectively, every year.

Key reason for success: Cisco has one senior vice president in charge of corporate development, who is responsible for M&A, strategic alliances, and technology incubation.

Cisco will first assess whether a target company has a technology that is critical to Cisco's core products. The target companys technology, when combined with Cisco's technologies, must provide solutions that customers will demand immediately and in the future. If that is likely, Cisco will acquire the company right away. It absorbs other firms technologies only if their facilities and people are located nearby. Cisco avoids deals that would require employees to relocate because they usually leave the company instead of moving. When there is a high degree of uncertainty around technologies, or when they aren't critical, Cisco uses alliances as steppingstones to acquisitions.

Thank You