Digi-sign Strategic Alliance Agreement Template Made Easy

Digi sign strategic alliance agreement template

hello everyone welcome back to another video today we will be talking about joint ventures and strategic alliances and this is an important strategic alternative for all types of businesses whether they're very small or very large and publicly traded and although I'm going to be referencing some statistics in the presentation that focus on the larger companies and really have their performance using joint ventures and strategic alliances the lessons I'm going to communicate in this video are applicable to all sizes of businesses from small to big and it's very important and the thinking behind these partnerships depending on their involvement is leveraging the comparative advantage of your partner in order to achieve a shared outcome so whether it's a joint venture or strategic alliance me as a small business I recognize that one of my competitors or someone in another industry can really help me achieve a new market achieve you know better distribution systems whatever it is that I need to do and so I approach that individual and I ask them hey can you help me and so we divvy up the profits based on again you know the shared responsibilities of those individuals but at the end of the day you're accelerating your growth and the thinking is yes you're relinquishing control and some profits but if you have a smaller percentage of a bigger pie it's much better than a larger percentage of a smaller pie and so that's really the strategic thinking behind to inventors and strategic alliances so let's talk about joint ventures first in a joint venture two or more companies combine certain assets and work towards jointly achieving a business objective usually the time period of this combination is defined and limited in duration so it's not indefinite such as M&A so the companies involved in a joint venture maintained their own separate business operations and continue to exist apart as they did before the joint venture this venture is then formally created as a business entity such as a separate corporation or partnership a formal agreement among the venture participants sets forth the extent to which each will exercise control over the ventures activities and profits essentially a company sim literally names this joint-venture so if it's company ABC the the the joint venture is ABC International Inc right and so essentially they put some of their assets that they need in order to achieve that goal and they combine it with the assets and resources of their joint venture partner and that's a separate entity although ownership of that entity still relies with the business therefore the performance of that joint venture is still reported on the financial statements of the two partners it's just that again it's an operating interest rather than a full business line that they own a hundred percent of okay so how are joint ventures used well joint ventures can be used for a variety of purchase purposes but the core purpose is to leverage the comparative advantage of each company to improve overall profitability and move towards a common goal and some common goals may be it offers a medium in which two companies can work together tests or culture compatibility in order to determine whether a potential merger could emerge and this is very very important because a lot of the successful value-creating M&A that has come in the past has come where two companies that have offer operated in the same industry for a long period of time they are very familiar with each other each other have worked together through joint ventures or strategic alliances and eventually decide to merge and they're like hey we know each other's cultures we know that we can work together therefore our merger is more likely to be successful and that's what happens it can also enhance overall ardi capabilities gain access to key supplies or foreign markets and enhance distribution systems so let's talk about each of these so enhancing overall R&D capabilities so a company such as a pharmaceutical company may enter into a joint venture with another business that has some specific capability that it needs to further its R&D process in addition if a more junior company needs funding to complete a R&D project but is reluctant to source public financing a joint venture with a larger company could provide a unique alternative to source financing and this is very common in the pharmaceutical industry for smaller companies that are in the early stages of development or for in the commodity sector where you have a junior company that owns lands rights so they don't actually own a mine but the rights to a certain plot of land they've conducted some geological tests and realized that hey there is or on this ground that can be mined but we don't have a the management experience to understand how to really build a mine and at the same time we don't have you know the name to go to the market and source that funding so what you do is you partner with a much larger international company multinational company you've really wished some of your ownership in that for that land but you receive the support needed and the financing needed to develop that land in order to really set up a mind and become profitable and so that's what happens with a lot of junior companies now gaining access to key supplies two or more companies may form a joint venture so they can have a better source of supplies for the production process such supplies could range from joint exploration for oil by petroleum companies to joint training programs for workers now an example to really explain the benefit is if company a owns the necessary equipment that Company B needs in order to complete the drilling of certain oil sands of a certain oil sands region a joint venture would be effective you would set that joint venture up where ownership rights in for that respective land or the right to drill on that respective land is is given by Company B to the entity and company a transfer some of its equipment whether it's you know the excavators or you know the trucks or whatever any they need they transfer some of the ownership or they lease those equipment to that entity and therefore that entity operates and does the tasks that Company B wants to achieve while company a receives some of the profits now a very good example and I'll talk about enhancing distribution systems is is Starbuck so with distribution systems say for example you want to enter a new market and you don't have a distribution system established right you can acquire a company which can be very very expensive especially if you realize that this is not the right market and eventually have to pull out and sell that company so the better way to go about is to set up an alliance or strategic venture in which you as a company such as Starbucks would give up the rights to your brand and you transfer the distribution rights for that brand in that respective region to the joint venture and then the other partner in that joint venture would be the franchisee owners or a someone very very influential and recognized in that respective market who has a local understanding of how to really develop the the stores or the the distribution system needed and so and so with Starbucks so consider Starbucks international when the company enters a new market as it did with China in the late 1990s instead of building and operating the stores themselves the company established joint ventures with franchisee owners in the country and so a statement which really summarizes the relationship between them and the franchisees owners is this one so how we choose partners is critical to the success we enjoy you could say we're kind of picky we like to delve deep into another company's sole shared values strategic fit good leadership and a strong track record are among the most important qualities we look for and so first Starbucks they've been very very successful and the reason why is because they have this emphasis and so this statement not only explains to you how distribution systems can help a company like Starbucks but at the same time the reason why they've been so successful the reason why is that Starbucks emphasizes you need to really have a similar thinking because at the end of the day as the definition really describes it you're working towards a common goal with a joint venture you're trying to achieve the same thing so if there's differing perspectives or differing opinions on different topics within that you know overall service offering or product offering then conflict can arise and that's why Starbucks has been so successful they've really sought out the right joint venture partners and that's why they've been able to have a world-class distribution system through joint ventures so let's talk about shareholder wealth effects on joint ventures so McConnell and nan tell did a study of a hundred and thirty six joint ventures involving 210 US companies over the period of 1972 to 1979 and I'll say that it's a little out of out of date but unfortunately we don't have much more recent data so the study was an announcement period shorter short term oriented study that compares with many of the event studies that have been conducted for M&A announcements and so essentially what that means is that this study looked at how shareholders reacted once an an announcement was put out that this company established a joint venture with whatever partner they had so the study showed that shareholders and companies entering joint ventures enjoyed announcement period returns of 0.7 3 percent they also found that gains were fairly evenly distributed across a venture participants so there was a slight improvement in the share price and so that's relative to the day before when the market was not able to price in the the value of joint ventures so essentially it means that it really it's not destroying value but its incremental II creating value for the company now the study supports the idea that when considering the shareholder value wealth affects joint ventures are a viable alternative to a merger or an acquisition one thing that a joint venture will not provide and for requires that is a good thing is a large bio premium for target shareholders with all that premium the opportunities for management to make bad decisions by overpaying may be much more limited they may still be able to negotiate poor terms for their own companies but the opportunities for large financial losses may be more limited and this is very very beneficial so it's a great way to really test out different strategies before really committing to buying those assets now what about the shareholder wealth effects for the type of joint venture so Johnson and Houston analyzed a sample of 191 joint ventures over the period of 1991 to 1995 a little more updated now they divided their sample and two joint vertical joint ventures which made up 55% of the study in horizontal joint ventures which made up 45% they defined vertical joint ventures as transactions between buyers and suppliers and horizontal joint ventures as transactions between companies that are in the same general line of business the results showed average positive gains from joint ventures equal to one point six seven percent so this is a more updated number relative to the earlier study which showed a positive overall return of 0.7 three so this shows that yes the value is created overall among both vertical and horizontal for horizontal joint ventures it appears that the gains are shared by the venture participants the average returns for vertical joint ventures are somewhat higher at two point six seven percent so gains are shared for venture participants and it seems that for vertical joint venture ventures there's a clearly significant positive game of 2.7% for shareholders now when they looked at the vertical sample the gains did not accrue to both parties so although this premium is shared among participants the much higher premium of two point six seven percent was actually not shared by both parties suppliers gained an average of five percent with 70 percent of the returns being positive while buyers received an average return of only 0.32 percent which was not statistically significant and of which only 53 percent of the returns were even positive so for vertical joint ventures the biggest winners were suppliers who were able to capture the bulk of the gains while the market did not see major benefits for buyers so this makes both logical sense and is very very important so with joint ventures a vertical joint venture creates clear value and much larger value for the suppliers so going back to that example with Starbucks they are the supplier in that example because they're supplying their brand there they're supplying the products the coffee beans and all the supplies that are needed whereas the buyers are essentially the distributors of those products are the franchisee owners in China or in international markets and so it clearly shows and this supports the statement that the suppliers in vertical joint ventures are the clear winners so this is very very important now what about restructuring and joint ventures so this is an opportunity for companies who are interested in selling entities so if it's a conglomerate or a business with many many divisions joint ventures can be used as a way to exit a business so consider a company that wants to divest itself of a division but is having difficulty finding a suitable buyer for a hundred percent of the company that would provide a sufficient value to make the company sell off the division one alternative would be to sell off part of the company in effect run the division as a jointly owned entity so it's kind of an equity carve out so if the goal of the company doing the partial sale is really to be able to do a hundred percent sale and may negotiate terms with a partial buyer whereby that buyer would be able to purchase the remaining shares in the division at some point in the future based on the occurrence of certain events so really it's an inequity carve-out but it's it can be structured as a joint venture where you move that asset into the joint venture and if one that your joint venture partner is only able to buy 40 percent of that asset will they own 40% of the profits in that joint venture and over time as those profits really go down to that partner they build up their cash position and are able to really fully buy out that asset now what about some potential problems now the potential problems with joint ventures are as varied as the type of ventures they may fail for many many reasons but here are some examples so the number one of course and this is the same for M&A the partners do not work well together the personalities don't mesh there are disagreements between the participants due to conflicting venture goals which were not established at the beginning that's why Starbucks emphasizes on having those shared values on having those shared goals it may require the sharing of internet intellectual property which one participant may not be willing to share because they're afraid oh hey they're gonna steal our IP and therefore we've lost our competitive advantage and therefore they're not as involved in joint venture and therefore it will fall apart one partner ignores the hold the passage of the other and therefore they're not fully committed so hold up hazards are essentially the investment made in order to really start that joint venture so say for example you have a distribution system joint venture where you have a supplier and the distributor now if the distributor needs to make an investment in order to really modernize your distribution system in order for that supplier to really take advantage of that distribution system that initial investment is not covered in the joint venture the supplier has to do the distributor has to put up that that investment initially in order to just enter the joint venture and if the supplier does not respect that investment and therefore relinquish a little bit more control and a little bit more profit to compensate for that investment then usually the joint venture does fall apart in the early negotiation stages in addition some joint ventures just fail to accomplish what they set out to do and thankfully enough because it has a set life after you exit that to invent hram you don't have to stay in that unprofitable business or you know stream now let's talk about strategic alliances so strategic alliances are less formal associations between companies compared with joint ventures in a joint venture a separate entity is often created whereas in a strategic alliance the agreement and the relationship are less formal so that's the big difference between it too and and surprisingly enough you'll see a lot of incorrect information online so I can both how partnerships simply sharing brands or consider joint ventures the sharing of brand names are considered strategic alliances because you're not transferring ownership of that brand into a separate entity you still own that brand with your own company you're just partnering you're setting up an alliance in order to co-create or Co represent one certain product now enhancing R&D is a major reason why companies form strategic alliances so Robinson reports a National Science Foundation study that indicated that one company intend so one out of ten companies that was involved in R&D finance such work outside of the company either through joint ventures of strategic alliances now the governments of strategic alliances is really the big thing because here you're not set setting up a separate entity instead you're really signing a contract and stating and making the commitment that I'm going to do X and and that's much harder to enforce so when a company acquires another company the governance processes huh it is really set in there in the sense that the acquire pays for and receives the right to control the target the governance of strategic alliances is bilateral and is determined by the agreement the Alliance partners interest to as well as by factors such as the non legal commitment of the Alliance partners to make the Alliance succeed so when you acquire come it doesn't matter how the people of that acquired company feel you owned them technically which is not it's very very bad to say that because then you that creates further conflict but essentially yes you paid a significant premium to acquire they're the right to really tell them what to do but with strategic alliances you only have a contractual agreement and majority of the time as long as you meet what's on the paper technically you're following the contract but if people are not fully invested in that strategic alliance most of the time it won't work and that's why the success rate with strategic alliances and therefore the things that are less involved are significantly lower so if the success of the strategic alliance requires that you share confidential information then the parties must be confident that this valuable intellectual property will not be used inappropriately now what are the shareholder wealth effects of strategic alliances so one study looked at the shareholder wealth effects of 345 strategic alliances over the period of 1983 to 1992 almost 1/2 of their sample involved alliances for marketing and distribution purposes so for the overall group they found positive abnormal returns equal to 0.6 4% very very similar to the same study conducted for joint ventures so the study also found no evidence of significant transfers of wealth between Alliance partners this implies that there was no evidence that one partner was gaining at the expense of the other and this is very good because usually when we talk about strategic alliances you have a very very big company taking advantage of the niche expertise of a smaller company or a smaller company trying to take advantage of the distribution system of a larger company at the end of the day both share in relative terms in percentage terms it's clear but of course in dollars terms if it's a larger company then really the amount of dollars will be much lower relative to their overall earnings potential compared to the smaller company which can gain much more in percentage terms because they're smaller now looking at the type of strategic alliance so the shareholder wealth effects for the type the same study also looked at how the shareholder wealth affects a very bad type of alliance they separated their sample into horizontal and non horizontal alliances so essentially vertical alliances they found that alliances that involved the transfer of technology provided the highest cumulative abnormal return of three point five four percent now this may it may help explain why she took alliances occur so often between technologically oriented companies non horizontal alliances that were done to enter a new market provided a positive below IRR return of one point four five percent now both of these returns are great they're not insignificant they're clear positive return but it seems that based on this study horizontal alliances are much more successful and it's interesting because if if vertical joint ventures are more successful than horizontal joint ventures then why are horizonte alliance is more successful than vertical alliances well maybe it's that level of involvement with higher involvement and therefore setting up a separate entity rot rather than a contractual agreement people are more committed and therefore you'll see that suppliers can take advantage of of the distributor's who are going to be distributing their product or the buyers of their product right so that's why joint ventures work vertical joint ventures work with horizontal alliances because both of them specialize in one respective area maybe they're not as committed but because of their specialization they can increase the amount of of knowledge and buying power and market power that they have to therefore increase their returns so that's really my thinking when I was reading this now another study showed that the abnormal returns were negatively correlated with both the size of the Alliance partners and their profitability big big statement right here we see that the market is concluding that larger and more profitable partners will capture fewer of the gains from the Alliance this is not imply that the partnerships are not also good for larger companies given that they are bigger and their profits are greater the relative impact is much smaller for younger businesses however the strategic alliance offers an interesting alternative so as I said before in relative turns the dollar impact for larger companies working with smaller companies through strategic alliances is much lower however at the same time you'll see that that level of involvement is much lower as well and therefore the profitability of that Alliance will is not as high so if small companies partner with medium-sized companies or larger smaller companies so not as long the more the bigger in size your alliance partner is the less they're gonna care about you as a smaller company and therefore the profitability of your lines is much less so it makes rational sense based on statistics and based on the studies that are available over here that working with maybe a medium-sized company where they may not benefit the same amount but still benefit a there is a clear value from the strategic lines there's more profitable areas of opportunity for the smaller strategic alliance partner so hopefully you're able to get that so now what determines the success of strategic alliances this is another big question so which types of alliances are more likely to be successful and which will be more difficult to pull off well a study analyzed a sample of 78 companies that reported on 1572 alliances that have been established for at least two years this is a big sample group now they found that firms that had more experience with alliances were more likely to be successful in future alliances which makes sense also companies that had a dedicated Alliance function such as a department and department head dedicated to overseeing alliances at the company and row 2 were more likely to be successful with their alliances and so the success rate was 68% relative to a 50% success rate so that's an 18% increase in the success rate a clear clear advantage so the big takeaway from this slide is that if you are a small business you don't have a lot of people and and and sometimes you might lack the really the the management capabilities to manage a strategic alliance but it's important it is very important to focus on that alliance in order for it to be successful because if you just leave it to one side and hope that the people meet their contractual obligations the success rate is not as high and therefore you might not be as profitable so as long as you dedicate one person or maybe a group of people if you have the opportunity to the success of your alliances will be much more profitable and much higher so just the final slide in this presentation I wanted to really compare the level of commitment across the different partnerships so strategic alliances feature less involvement between the Alliance partners than joint ventures which in turn are also a lesser commitment than a merger or acquisition the question is whether the objectives of an acquisition can be achieved more cheaply through a joint venture or strategic alliance so looking at this illustration as you move to the right commitment increases so from strategic alliances you move to joint ventures where you actually set up a separate entity into M&A where the the two companies actually become one company now now so the level of commitment increases also as you head to the right the cost of integration the cost of a revert reversing that decision become much higher so the risk increases as you head towards that same direction so it's important when you are considering the strategic alternatives for your business to ask yourself do I really need to buy this company in order to achieve what I want can I set up a JV and really you try also not to set up a JV if you could maybe all you need is if you want to co collaborate on one respective product don't set up a five-year joint venture set up a strategic alliance with the specific function of co-creating this product for X amount of months for how much how long you want to sell that product for so this is the the thinking for business owners you want to ask yourself what am I giving up because you are giving up things with M&A you get control but at the same time you there's higher risk and higher higher cost with strategic alliances there's less risk but at the same time not as not a not as high of a level of commitment and therefore maybe not as successful so if it's a very technical in nature if it's something that involves a very a lot of commitment then strategic alliances are probably not your option so that's essentially it other than that if you have any other questions please do comment below and I'll be sure to get back to you as soon as possible and if you like the video please like and subscribe to the channel I appreciate all the support that I did that you guys can provide for me as I continue to build a channel and really help people learn more about business and different advisory topics so have a great day guys thank you