Strategy map

From Wikipedia, the free encyclopedia

A strategy map is a diagram that is used to document the primary strategic goals being pursued by an organisation or management team. It is an element of the documentation associated with the Balanced Scorecard, and in particular is characteristic of the second generation of Balanced Scorecard designs that first appeared during the mid 1990s. The first diagrams of this type appeared in the early 1990s, and the idea of using this type of diagram to help document Balanced Scorecard was discussed in a paper by Kaplan & Norton in 1996 [1].

The strategy map idea featured in several books and articles during the late 1990 by Kaplan & Norton and others, including most notably Olve and Wetter in their 1998/9 book Performance Drivers[2]

Across these broad range of articles, there are only a few common attributes: strategy maps show each objective as text appearing within a shape (usually an oval or rectangle); there are relatively few objectives (usually less than 20); the objectives are arrayed across two or more horizontal bands on the strategy map each band representing a 'perspective'; and broad causal relationships between objectives is shown with arrows that either join objectives together, or placed in a way not linked with specific objectives but to provide general euphemistic indications of where causality lies.

The purpose of the strategy map in Balanced Scorecard design, and its emergence as a design aid is discussed in some detail in a research paper on the evolution of Balanced Scorecard designs during the 1990s by Lawrie & Cobbold[3]

Contents [hide]

1 Origin of strategy maps

2 Perspectives

3 Creation of the Strategy Map - Hierarchical Relationships of the Perspectives

4 References

5 External links

[edit]Origin of strategy maps

The Balanced Scorecard is a framework that is used to help in the design and implementation of strategic performance management tools within organisations. The Balanced Scorecard provides a simple structure for representing the strategy to be implemented, and has become associated

with a wide selection of design tools that facilitate the identification of measures and targets that can inform on the progress the organisation is making in implementing the strategy selected ("activities"), and also provide feedback on whether the strategy is having the kind of impact on organisational performance that was hoped for ("outcomes"). By providing managers with this direct feedback on whether the required actions are being carried out, and whether they are working, the Balanced Scorecard is thought to help managers focus their attention more closely on the interventions necessary to ensure the strategy is effectively and efficiently executed.

One of the big challenges faced in the design of Balanced Scorecard based performance management systems is deciding what activities and outcomes to monitor. By providing a simple visual representation of the strategic objectives to be focused on, along with additional visual cues in the form of the perspectives and causal arrows, the strategy map has been found useful in enabling discussion within a management team about what objectives to choose, and subsequently to support discussion of the actual performance achieved.

[edit]Perspectives

Early Balanced Scorecard articles by Kaplan & Norton[4] proposed a simple design method for choosing the content of the Balanced Scorecard based on answers to four generic questions about the strategy to be pursued by the organization. These four questions, one about finances, one about marketing, one about processes, and one about organizational development evolved quickly into a a standard set of "perspectives" ("Financial", "Customer", "Internal Business Processes", "Learning & Growth"). Design of a Balanced Scorecard became a process of selecting a small number of objectives in each perspective, and then choosing measures and targets to inform on progress against this objective. But very quickly it was realised that the perspective headings chosen only worked for specific organisations (small to medium sized firms in North America - the target market of the Harvard Business Review), and during the mid to late 1990s papers began to be published arguing that other sets of headings would make more sense for specific organization types (e.g. Butler et. al[5]) and that some organisations would benefit from using more or less than four headings (e.g. [6]).

Despite these concerns, the 'standard' set of perspectives remains the most common, and traditionally is arrayed on the strategy map in the sequence (from bottom to top) "Learning & Growth", "Internal Business Processes", "Customer", "Financial" with causal arrows tending flow "up" the page.

[edit]Creation of the Strategy Map - Hierarchical Relationships of the Perspectives

The creation of the strategy map for an organisation is the key first step in the balanced scorecard methodology. It involves a clear definition of business strategies and is typically achieved after a number of highly intensive brainstorming sessions in which key business heads representing all functions and processes are required to participate.

A vital prerequisite to building a coherent and realistic strategy map is a proper understanding of the hierarchical inter-dependencies between the perspectives used. Each perspective contains one or more objectives that each in turn is associated with one or more performance measures and target values. It follows that the arrangement of objectives on the strategy map needs to be devised keeping in mind the dependencies implied by the choice of perspective headings.

Turnaround strategy

Turnaround strategy objectives

The overall goal of turnaround strategy is to return an underperforming or distressed company to

normal in terms of acceptable levels of profitability, solvency, liquidity and cash flow.

Turnaround strategy is described in terms of how the turnaround strategy components of

managing, stabilising, funding and fixing an underperforming or distressed company are applied

over the natural stages of a turnaround.

To achieve its objectives, turnaround strategy must reverse causes of distress, resolve the

financial crisis, achieve a rapid improvement in financial performance, regain stakeholder

support, and overcome internal constraints and unfavourable industry characteristics.

For more information on what makes turnaround strategy viable, see qualitative turnaround

viability assessment.

Turnaround strategy as turnaround stages and turnaround strategy components

 

"Ah, Love! could thou and I with Fate conspire To grasp this sorry Scheme of Things entire! Would not we shatter it to bits - and then Re-mould it

nearer to the Heart's Desire!"

- Omar Khayyam.

 

The CRS Turnaround's turnaround strategy model   maps the turnaround strategy components   to

the natural stages of a turnaround.

Turnaround strategy components

The components of turnaround strategy are:

Managing the turnaround   in terms of turnaround leadership, stakeholder management, and

turnaround project management.

Stabilising  the distressed company by ensuring the short-term future of the business through

cash management, demonstrating control, re-introducing predictability and ensuring legal

and fiduciary compliance.

Funding  and recapitalising the distressed business.

Fixing the distressed company in strategic, organisational and operational terms.

Turnaround stages

Turnaround stages   comprise of the following:

Recognising the need for a turnaround .

Turnaround situation assessment .

Emergency management

Turnaround plan refinement

Turnaround restructuring

Turnaround recovery

 

View the turnaround strategy components diagram

 

 

View the turnaround stages diagram

Turnaround strategy phasing

CRS Turnaround's turnaround managementphilosophy revolves around short-term

survivability   (getting the business "out of the hole") while endeavouring not to

compromiselonger-term turnaround viability   (how to "climb the mountain") thereafter.

In doing so, we find answers to the following questions:

How did it fall into the hole? (causes of distress).

How deep is the hole? (severity of the financial crisis, and number and nature of internal and

external constraints faced).

How will it get out of the hole? (short-term turnaround strategy).

What does it mean to be out of the hole? (short-term financial turnaround

objectivesand stakeholder support).

How will it climb the mountain? (longer-term turnaround strategy inclusive of asset reduction

and strategic repositioning).

How high is the mountain? (vision).

 

 

View the turnaround phasing diagram.

 

 

Turnaround strategies often fail since they focus on achieving a longer-term vision without

getting out of the hole in the first place – thereby dying in the process.

Turnaround strategies also often fail because they focus on getting out of hole without a strategy

for sustainable recovery.  Suchturnarounds which focuses on short-time survivability or a

financial turnaround alone tend to be short-lived.

To get out of the hole successfully, certain longer-term sacrifices often need to be made if the

financial crisis is severe.

Seamlessly dovetailing the actions of getting out of the hole, and climbing the mountain, requires

careful stakeholder management.

Generic turnaround strategies

The financial objectives of a turnaround is to achieve improved cash flow, profitability, solvency

and financial returns.

The generic operational turnaround strategies associated with the value chain are:

Operational turnaround strategy

Revenue enhancement.

Cutback action, which has two dimensions - cost reduction and asset reduction.

View the generic turnaround strategies diagram.

 

An operational turnaround strategy may be, and usually is underpinned by a further set of

generic organisational and strategic turnaround strategies:

Financial turnaround strategy

This turnaround strategy refers to financial restructuring with a view to strengthening the

balance sheet and/or provide funding.

Reorganisation turnaround strategy

Operational turnaround implies changes to the value chain, which in turn requires changes in the

organisational structure of the underperforming or distressed business.   Reorganisation may also

entail changes to the leadership team.

Strategic repositioning turnaround strategy

Improving effectiveness and efficiency may not be enough.  Often the turnaround is also based

on chances the business domain and value proposition of the business.

 

These turnaround strategies are normally employed in combination rather than individually, as

illustrated in the diagram on the left.

Operational turnaround strategy

The business case for different turnaround strategy-structure-value chain combinations dictates

the degrees of freedom open to theturnaround practitioner. 

The Hofer model for selecting turnaround strategy model reproduced below indicates which

operational turnaround strategies to employ with reference to how far theturnaround situation is

from breakeven.

 

View the diagram explaining the Hofer operational turnaround strategy model.

 

 

What is the ROI for each turnaround strategy or combination of strategies?  Can the turnaround

strategy be funded given thedegree of financial distress   the business finds itself in?  How much

time is stakeholders   willing to give before wanting to see tangible results?  What are the risks?

If the distressed company is operating in any of corridors A, B or C it needs a turnaround strategy

to reach corridor D where returns at least equal the opportunity cost of capital. 

This could be achieved through cost reduction.

However, if the distressed company is operating in corridors A or B, it needs revenue enhancing

strategies in addition to cost reduction. 

This means beefing up its demand generation capability (segment, target, position, sell, after-

sales service) and its demand fulfillment capability (inbound logistics, operations, outbound

logistics, general service delivery capability). 

CRS Turnaround has had considerable successes in the past where turnaround strategies were

based on improved sales and marketing in addition to a mere cost reduction focus.

Finally, if the distressed company is operating in corridor A, it needs asset reduction strategies in

addition to revenue enhancing and cost reduction strategies.

Revenue enhancement as a turnaround strategy

Revenue enhancement focusses on increasing sales through improvement of systems, processes

and technology in the primary value chain activities:

Customer management processes such as sales and marketing, and after-sales service to

increase turnover through more effective sales force performance, new products, improved

functionality and range of products, new markets, better promotion, etc.

Operations management processes - inbound logistics, operations, outbound logistics - to

increase performance on quality and lead time, thereby raising customer satisfaction through

increased service delivery capability.

Innovation processes - Research and Development to increase the ability to offer the market

new products.

The lead time for revenue enhancement is normally longer than that of cost reduction.

If the business is in a financial crisis and revenue enhancement cannot be funded, revenue

enhancement often follows after cost reduction and/or asset reduction initiatives have generated

cash.

Increasing sales are required if the distressed company operate below breakeven.

Revenue enhancement takes longer to have effect than cost reduction though.

Cost reduction as a turnaround strategy:

Cost reduction is the turnaround strategy having the fastest impact on the bottom line. 

Overhead and direct costs in the primary value chain and support functions are normally reduced

to a level that can be borne by the level of sales that will remain after cost cutting.

Overhead cost reduction takes place in chunks.  Removing more and more chunks eventually

means that some business units or product lines cannot be supported anymore, and the sales

associated with those fall away too.

Cost reduction often involves retrenchment   of employees, especially in turnaround

situationswhere salaries and wages represent a large portion of the cost structure.

We don't believe in cutting costs to the bone - thereby inhibiting the organisation's ability to

create, fulfil and administer demand.

Asset reduction as a turnaround strategy

Working capital reduction is common to any turnaround.

However, if the distressed company is too far below breakeven, working capital reduction,

revenue enhancement and cost reduction strategies alone will not suffice.

In this situation, the turnaround   strategy is normally to shrink the business into profitability. 

In such cases, cutback action takes the form of shrinking into profitability by means of portfolio

disinvestment. 

This involves closure or sale of business units, divisions, operations and assets, and outsourcing

of value chain activities in order to focus on the remaining profitable or potentially profitable

business units or sections of the value chain. 

Such downscoping represents a kind ofstrategic repositioning by itself.

As with cost reduction , closure and outsourcing of business units involvesretrenchment of

employees.

Portfolio disinvestment through selling off assets is often used as mechanism to raise cash for the

turnaround.

For more information on revenue enhancement and cutback action, seeoperations consulting.

Reorganisation as a turnaround strategy:

In our experience, reorganisation always forms part of turnaround management. 

Reorganisation deals with all the people issues in the business.  It entails restructuring, restaffing,

reskilling and turnaround leadershiprevitalisation to yield improved leadership, management,

organisational structure, organisational alignment and culture.

Reorganisation is invariably required to ensure success of the other turnaround strategies viz.

strategic repositioning, revenue enhancement, cost reduction or asset reduction.

Depending on the turnaround situation, reorganisation can be limited to leadership alignment,

and better management systems for planning and control of the company.

Often, however, the extent of reorganisation required goes as far as changes in top management

and in the organisational structure.

For more information on reorganisation, see organisational consulting.

Strategic repositioning as a turnaround strategy:

Strategic repositioning holds the most potential but is the most neglected turnaround strategy

according to academic research.

When properly employed, strategic repositioning yields the most spectacular and sustainable

turnaround results.

Strategic repositioning changes the mission and customer value proposition of the distressed

company by changing what products are offered to what markets and in which fashion.

In doing so it changes the revenue - cost - asset structure of the business, yielding improved

profitability and return on capital employed.  It may do so by either growing, shrinking or

refocusing the business.

For the single business unit business, strategic repositioning entails a compete rethink of why it is

in business and how it is to achieve a sustainable competitive advantage. 

For the multi-business unit or multi-product line situation, strategic repositioning may additionally

entail portfolio disinvestment, as inasset reduction, to focus on the core business.

Conversely, it may entail growing the portfolio to enhance sales and profitability.  Growth,

however, normally requires investment inter alia in new technology and people, and switching

costs exist.  If the business is in severe distress, lack of turnaround funding often prohibits this

line of action.

Strategic repositioning is therefore in practice more often employed after cost reduction has

been successful, if at all.

For more information on strategic repositioning, see strategy consulting.

The impact of stakeholder support on turnaround strategy

Stakeholders   are seldom interested in aturnaround plan that may look good on paper, but which

won't show results in the foreseeable future.

Stakeholders often require short-term results first before finally approving a longer-term plan.

In turnaround management   it is therefore imperative to resolve the financial crisis, and rapidly

show an impact on cash flow and the bottom line to prove survivability.

Selection of turnaround strategies therefore has to heed turnaround phasing requirements,

typically:

Stabilise the business, and execute first-stage restructuring such as reorganisation, cost

reduction and working capital reduction using short-term or internally generated finance.

Having gained the support and confidence of stakeholders, embark on the major

restructuring programme involving revenue enhancement and strategic repositioning using

finance of a longer-term natur

Cases of Turnaround Strategy –

Hindustan Motors' Struggle for SurvivalCase DetailsCase Intro 1 Case Intro 2Excerpts

 

++ Font | Font --

ICMR HOME | Case Studies Collection

Case Details:

Case Code : BSTR021

Case Length : 10 Pages

<< Previous

"Hindustan Motors is a case study of complacency."

- A December 28, 1999, Business India report.

Troubled Waters?

In October 1998, Hindustan Motors (HM), makers of one of India's best known cars - the Ambassador - launched a new car, the Mitsubishi Lancer (Lancer). The launch of Lancer, a new car from the HM stable after nearly two decades, was reported to be very important for the company, whose market share was on the decline.

HM was reportedly banking heavily on the Lancer's success to fight competition from other car companies. Lancer was positioned in the mid-size luxury car segment, which was dominated by Maruti Udyog's (MUL) Maruti Esteem and Honda's Honda City. 

Lancer was received very well by automobile experts throughout the country, largely due to its technical finesse. The car's sales reached 2,866 units by the end of the fiscal 1998-99. Much to HM's delight, Lancer was even ranked as the top vehicle in India for the three consecutive years (1999, 2000 and 2001) by J. D. Powers1 for the least number of defects and high customer satisfaction in a countrywide survey of car owners.However, the company's euphoria was short-lived as Lancer's sales failed to pick up as expected. While 7,621 cars were sold in 1999, HM managed to sell only 7,635 cars in 2000-01 against a forecast of 8,000.2 On the other hand, sales of Honda

Period : 1998 - 2002

Organization : Hindustan Motors

Pub Date : 2002

Teaching Note : Available

Countries : India

Industry : Auto and Ancillaries

To download Hindustan Motors'

Struggle for Survival case

study (Case Code: BSTR021) click

on the button below, and select the

case from the list of available cases: 

Price:

For delivery in electronic format: Rs.

300 ;

For delivery through courier (within

India): Rs. 300 + Rs. 25 for Shipping &

Handling Charges 

» Business Strategy Case Studies

» Business Strategy Short Case

Studies

» View Detailed Pricing Info

» How To Order This Case

» Business Case Studies

» Area Specific Case Studies

» Industry Wise Case Studies

City increased to 10,011 in 2001 from 9631 in 1999 (Refer Exhibit I for the sales comparison). Meanwhile, HM's other offerings Ambassador and Contessa were also faring badly.

In 1999, Ambassador's sales were down to 15,374 from 18,312 in 1998 and Contessa's to 285 from 575 in 1998. This poor performance took a heavy toll on the company's bottomline and HM reported a net loss of Rs 615.8 million for the fiscal 1999-00. (Refer Table I). The company had reportedly accumulated losses worth Rs 1.1 billion during 1999-2001.3  In late 2001, HM announced its plans to launch another car, the Mitsubishi Pajero. The company planned to import fully assembled cars and sell them by early 2002. Analysts remarked that the Pajero could do little to revive the company's fortunes as despite many efforts to turn itself around, HM had failed to regain its 4-decade long leadership in the Indian passenger car market. Its 3.3% market share in the half-year ending September 2001, proved beyond doubt that the company was struggling to stay afloat

» Company Wise Case Studies

 

Please note:

This case study was compiled from

published sources, and is intended to be

used as a basis for class discussion. It is

Diversification (marketing strategy)From Wikipedia, the free encyclopedia

Diversification is a form of corporate strategy for a company. It seeks to increase profitability

through greater sales volume obtained from new products and new markets. Diversification can

occur either at the business unit level or at the corporate level. At the business unit level, it is

Search

most likely to expand into a new segment of an industry which the business is already in. At the

corporate level, it is generally[clarification needed] and it is also very interesting entering a promising

business outside of the scope of the existing business unit.

Diversification is part of the four main marketing strategies defined by the Product/Market Ansoff

matrix:

Ansoff pointed out that a diversification strategy stands apart from the other three strategies.

The first three strategies are usually pursued with the same technical, financial, and

merchandising resources used for the original product line, whereas diversification usually

requires a company to acquire new skills, new techniques and new facilities.

Note: The notion of diversification depends on the subjective interpretation of “new” market and

“new” product, which should reflect the perceptions of customers rather than managers. Indeed,

products tend to create or stimulate new markets; new markets promote product innovation.

Contents

 [hide]

1     The different types of diversification strategies   

o 1.1      Concentric diversification   

o 1.2      Horizontal diversification   

1.2.1      Another interpretation   

o 1.3      Conglomerate diversification (or lateral diversification)   

2     Rationale of diversification   

3     Risks   

4     See also   

5     References   

[edit]The different types of diversification strategies

The strategies of diversification can include internal development of new products or markets,

acquisition of a firm, alliance with a complementary company, licensing of new technologies,

and distributing or importing a products line manufactured by another firm. Generally, the final

strategy involves a combination of these options. This combination is determined in function of

available opportunities and consistency with the objectives and the resources of the company.

There are three types of diversification: concentric, horizontal and conglomerate:

[edit]Concentric diversification

This means that there is a technological similarity between the industries, which means that the

firm is able to leverage its technical know-how to gain some advantage. For example, a

company that manufactures industrial adhesives might decide to diversify into adhesives to be

sold via retailers. The technology would be the same but the marketing effort would need to

change. It also seems to increase its market share to launch a new product which helps the

particular company to earn profit. However, there's one more example, Addition of tomato

ketchup and sauce to the existing "Maggi" brand processed items of Food Specialities Ltd. is an

example of technological-related concentric diversification.

[edit]Horizontal diversification

The company adds new products or services that are technologically or commercially unrelated

(but not always) to current products, but which may appeal to current customers. In a

competitive environment, this form of diversification is desirable if the present customers are

loyal to the current products and if the new products have a good quality and are well promoted

and priced. Moreover, the new products are marketed to the same economic environment as

the existing products, which may lead to rigidity and instability. In other words, this strategy

tends to increase the firm's dependence on certain market segments. For example company

was making note books earlier now they are also entering into pen market through its new

product.

[edit]Another interpretation

Horizontal integration occurs when a firm enters a new business (either related or unrelated) at

the same stage of production as its current operations. For example, Avon's move to market

jewelry through its door-to-door sales force involved marketing new products through existing

channels of distribution. An alternative form of that Avon has also undertaken is selling its

products by mail order (e.g., clothing, plastic products) and through retail stores (e.g., Tiffany's).

In both cases, Avon is still at the retail stage of the production process.

[edit]Conglomerate diversification (or lateral diversification)

The company markets new products or services that have no technological or commercial

synergies with current products, but which may appeal to new groups of customers. The

conglomerate diversification has very little relationship with the firm's current business.

Therefore, the main reasons of adopting such a strategy are first to improve the profitability and

the flexibility of the company, and second to get a better reception in capital markets as the

company gets bigger. Even if this strategy is very risky, it could also, if successful, provide

increased growth and profitability.

[edit]Rationale of diversification

According to Calori and Harvatopoulos (1988), there are two dimensions of rationale for

diversification. The first one relates to the nature of the strategic objective: diversification may

be defensive or offensive.

Defensive reasons may be spreading the risk of market contraction, or being forced to diversify

when current product or current market orientation seems to provide no further opportunities for

growth. Offensive reasons may be conquering new positions, taking opportunities that promise

greater profitability than expansion opportunities, or using retained cash that exceeds total

expansion needs.

The second dimension involves the expected outcomes of diversification: management may

expect great economic value (growth, profitability) or first and foremost great coherence and

complementary to their current activities (exploitation of know-how, more efficient use of

available resources and capacities). In addition, companies may also explore diversification just

to get a valuable comparison between this strategy and expansion.

[edit]Risks

Diversification is the riskiest of the four strategies presented in the Ansoff matrix and requires

the most careful investigation. Going into an unknown market with an unfamiliar product offering

means a lack of experience in the new skills and techniques required. Therefore, the company

puts itself in a great uncertainty. Moreover, diversification might necessitate significant

expanding of human and financial resources, which may detracts focus, commitment and

sustained investments in the core industries. Therefore a firm should choose this option only

when the current product or current market orientation does not offer further opportunities for

growth. In order to measure the chances of success, different tests can be done:

The attractiveness test: the industry that has been chosen has to be either attractive or

capable of being made attractive.

The cost-of-entry test: the cost of entry must not capitalize all future profits.

The better-off test: the new unit must either gain competitive advantage from its link with the

corporation or vice versa.

Because of the high risks explained above, many companies attempting to diversify have led to

failure. However, there are a few good examples of successful diversification:

Virgin Media moved from music producing to travels and mobile phones

Walt Disney moved from producing animated movies to theme parks and vacation

properties

Canon diversified from a camera-making company into producing an entirely new range of

office equipment.

[edit]See also

Ansoff matrix

Market development

Market penetration

Product development

Product proliferation

Pure play (ant.)

Horizontal integrationFrom Wikipedia, the free encyclopedia

This article needs additional citations for verification.Please help improve this article by adding reliable references. Unsourced material may be challenged and removed.(March 2009)

A diagram illustrating horizontal integration and contrasting it with vertical integration.

Marketing

Key concepts

Product • Pricing

Distribution • Service • Retail

Brand management

Account-based marketing

Marketing ethics

Marketing effectiveness

Market research

Market segmentation

Marketing strategy

Marketing management

Market dominance

Promotional content

Advertising • Branding • Underwriting

Direct marketing • Personal Sales

Product placement • Publicity

Sales promotion • Sex in advertising

Promotional media

Printing • Publication • Broadcasting

Out-of-home • Internet marketing

Point of sale • Promotional items

Digital marketing • In-game

In-store demonstration • Brand Ambassador

Word of mouth • Drip Marketing

This box: view • talk • edit

In microeconomics and strategic management, the term horizontal integration describes a type of

ownership and control. It is a strategy used by a business or corporation that seeks to sell a type

of product in numerous markets. Horizontal integration in marketing is much more common than vertical

integration is in production. Horizontal integration occurs when a firm is being taken over by, or merged

with, another firm which is in the same industry and in the same stage of production as the merged firm,

e.g. a car manufacturer merging with another car manufacturer. In this case both the companies are in

the same stage of production and also in the same industry. This process is also known as a "buy out" or

"take-over".

A monopoly created through horizontal integration is called a horizontal monopoly.

A term that is closely related with horizontal integration is horizontal expansion. This is the expansion of

a firm within an industry in which it is already active for the purpose of increasing its share of the market

for a particular product or service.

Contents

 [hide]

1 Benefits of horizontal integration

2 Media terms

3 References

4 See also

[edit]Benefits of horizontal integration

Horizontal integration allows:

Economies of scale

Economies of scope

Economies of stocks

Strong presence in the reference market

[edit]Media terms

Media critics, such as Robert McChesney, have noted that the current trend within the entertainment

industry has been toward the increased concentration of media ownership into the hands of a smaller

number of transmedia and transnational conglomerates.[1] Media is seen to amass in centre where

wealthy individuals have the ability to purchase such ventures (e.g. Rupert Murdoch).

Horizontal integration, that is the consolidation of holdings across multiple industries, has displaced the

old vertical integration of the Hollywood studios.[2] The idea of owning many media outlets, which run

almost the same content, is considered to be very productive, since it requires only minor changes of

format and information to use in multiple media forms. For example, within a conglomerate, the content

used in broadcasting television would be used in broadcasting radio as well, or the content used in hard

copy of the newspaper would also be used in online newspaper website.

What emerged are new strategies of content development and distribution designed to increase the

“synergy’ between the different divisions of the same company. Studios seek content that can move

fluidly across media channels.[3]

Vertical integrationFrom Wikipedia, the free encyclopedia

This article needs additional citations for verification.Please help improve this article by adding reliable references. Unsourced material may be challenged and removed.(March 2010)

A diagram illustrating vertical integration and contrasting it with horizontal integration.

In microeconomics and management, the term vertical integration describes a style ofmanagement

control. Vertically integrated companies in a supply chain are united through a common owner. Usually

each member of the supply chain produces a different product or (market-specific) service, and the

products combine to satisfy a common need. It is contrasted with horizontal integration.

Vertical integration is one method of avoiding the hold-up problem. A monopoly produced through vertical

integration is called a vertical monopoly, although it might be more appropriate to speak of this as some

form of cartel.

Nineteenth century steel tycoon Andrew Carnegie introduced the idea of the existence and use of vertical

integration. This led other businesspeople to use the system to promote better financial growth and

efficiency in their companies and businesses.

Contents

 [hide]

1 Three types

2 Examples

o 2.1 American Apparel

o 2.2 Oil industry

o 2.3 Reliance

o 2.4 Motion picture industry

o 2.5 Music industry

3 Problems and benefits

o 3.1 Static technology

o 3.2 Dynamic technology

4 Vertical expansion

5 See also

6 References

7 Bibliography

[edit]Three types

Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers.

Contrary to horizontal integration, which is a consolidation of many firms that handle the same part of the

production process, vertical integration is typified by one firm engaged in different parts of production (e.g.

growing raw materials, manufacturing, transporting, marketing, and/or retailing).

There are three varieties: backward (upstream) vertical integration, forward (downstream) vertical

integration, and balanced (both upstream and downstream) vertical integration.

A company exhibits backward vertical integration when it controls subsidiaries that produce some

of the inputs used in the production of its products. For example, an automobile company may own a

tire company, a glass company, and a metal company. Control of these three subsidiaries is intended

to create a stable supply of inputs and ensure a consistent quality in their final product. It was the

main business approach of Ford and other car companies in the 1920s, who sought to minimize costs

by centralizing the production of cars and car parts.

A company tends toward forward vertical integration when it controls distribution centers and

retailers where its products are sold.

Balanced vertical integration means a firm controls all of these components, from raw materials to

final delivery.

The three varieties noted are only abstractions; actual firms employ a wide variety of subtle variations.

Suppliers are often contractors, not legally owned subsidiaries. Still, a client may effectively control a

supplier if their contract solely assures the supplier's profitability. Distribution and retail partnerships

exhibit similarly wide ranges of complexity and interdependence. In relatively open capitalist contexts,

pure vertical integration by explicit ownership is uncommon—and distributing ownership is commonly a

strategy for distributing risks.

[edit]Examples

One of the earliest, largest and most famous examples of vertical integration was the Carnegie

Steel company. The company controlled not only the mills where the steel was manufactured but also the

mines where the iron ore was extracted, the coal mines that supplied the coal, the ships that transported

the iron ore and the railroads that transported the coal to the factory, the coke ovens where the coal was

cooked, etc. The company also focused heavily on developing talent internally from the bottom up, rather

than importing it from other companies.[1]Later on, Carnegie even established an institute of higher

learning to teach the steel processes to the next generation.

[edit]American Apparel

American Apparel is a fashion retailer and manufacturer that actually advertises itself as a vertically

integrated industrial company.[2][3] The brand is based in downtown Los Angeles, where from a single

building they control the dyeing, finishing, designing, sewing, cutting, marketing and distribution of the

company's product.[3][4][5] The company shoots and distributes its own advertisements, often using its own

employees as subjects.[2][6] It also owns and operates each of its retail locations as opposed

to franchising.[7] According to the management, the vertically integrated model allows the company to

design, cut, distribute and sell an item globally in the span of a week.[8]The original founder Dov

Charney has remained the majority shareholder and CEO.[9] Since the company controls both the

production and distribution of its product, it is an example of a balanced vertically

integrated corporation.

[edit]Oil industry

Oil companies, both multinational (such as ExxonMobil, Royal Dutch Shell, ConocoPhillips or BP) and

national (e.g. Petronas) often adopt a vertically integrated structure. This means that they are active along

the entire supply chain from locating crude oil deposits, drilling and extracting crude, transporting it

around the world, refining it into petroleum products such as petrol/gasoline, to distributing the fuel to

company-owned retail stations, for sale to consumers.

[edit]Reliance

The Indian petrochemical giant Reliance Industries is a great example of vertical integration in modern

business. Reliance's backward integration into polyester fibres from textiles and further

into petrochemicals was started by Dhirubhai Ambani. Reliance has entered the oil and natural

gas sector, along with retail sector. Reliance now has a complete vertical product portfolio from oil and

gas production, refining, petrochemicals, synthetic garments and retail outlets.

[edit]Motion picture industry

From the early 1920s through the early 1950s, the American motion picture industry was dominated

by five vertically integrated studios. They controlled every aspect of making pictures—producing them,

distributing them around the nation and the world, and showing them in a large network of theaters that

they controlled.

[edit]Music industry

[edit]Problems and benefits

There are internal and external (e.g. society-wide) gains and losses due to vertical integration. They will

differ according to the state of technology in the industries involved, roughly corresponding to the stages

of the industry lifecycle.

[edit]Static technology

This is the simplest case, where the gains and losses have been studied extensively.

Internal gains:

Lower transaction costs

Synchronization of supply and demand along the chain of products

Lower uncertainty and higher investment

Ability to monopolize market throughout the chain by market foreclosure

Internal losses:

Higher monetary and organizational costs of switching to other suppliers/buyers

Benefits to society:

Better opportunities for investment growth through reduced uncertainty

Losses to society:

Monopolization of markets

Rigid organizational structure, having much the same shortcomings as the socialist

economy (cf. John Kenneth Galbraith's works)

[edit]Dynamic technology

Some argue that vertical integration will eventually hurt a company because when new technologies are

available, the company is forced to reinvest in its infrastructures in order to keep up with competition.

Some say that today, when technologies evolve very quickly, this can cause a company to invest into new

technologies, only to reinvest in even newer technologies later, thus costing a company financially.

However, a benefit of vertical integration is that all the components that are in a company product will

work harmoniously, which will lower downtime and repair costs.[citation needed]

[edit]Vertical expansion

Vertical expansion, in economics, is the growth of a business enterprise through the acquisition of

companies that produce the intermediate goods needed by the business or help market and distribute its

product. Such expansion is desired because it secures the supplies needed by the firm to produce its

product and the market needed to sell the product. The result is a more efficient business with lower costs

and more profits.

Related is lateral expansion, which is the growth of a business enterprise through the acquisition of

similar firms, in the hope of achievingeconomies of scale.

Vertical expansion is also known as a vertical acquisition. Vertical expansion or acquisitions can also be

used to increase scales and to gain market power. The acquisition of DirectTV by News Corporation is an

example of forward vertical expansion or acquisition. DirectTV is asatellite TV company through which

News Corporation can distribute more of its media content: news, movies, and television shows. The

pending acquisition of NBC by Comcast Cable (as of January 16, 2010) is an example of backward

vertical integration.

Of course, protecting the public from communications monopolies that can be built in this way is one of

the missions of the Federal Communications Commission.

[edit]See also

Conglomerate (company)

Vertical market

Exclusive dealing

Strategic management

Zaibatsu  (the Japanese approach to vertical integration)

Chaebol  (the South Korean counterpart to Zaibatsu)

Horizontal integration

Economic calculation problem  (although mostly discussed in relation to command economies, it

equally applies to firms)

Vertical disintegration

Alfred DuPont Chandler, Jr.  (economist who wrote extensively on vertical integration)

How to deal with the 4 types of M&A activity  By Bryan Hattingh

While value creation might be the fundamental credo of the mergers and acquisitions that make the headlines, the end result is often value destruction. Most mergers fail to reach the value goals set by top management, with the two parties which join forces generally disappointing their constituencies, under-performing, and destroying value in more than half of the cases. Today's rapidly changing business world makes intense demands on those involved in the combination of two separate, highly distinct companies into one solid organisation. BRYAN HATTINGH, CEO of leadership solutions group Cycan, says there are various types of mergers and acquisitions and that companies would do well to consider the principles behind each before signing on the dotted line.

Mergers and acquisitions (M&As) take place in starkly different circumstances. These circumstances can significantly impact the way in which deals are approached, executed and managed. They introduce different degrees of risk, largely pertaining to and influenced by the leadership and human capital components.

There are four categories of M&A activity defined in terms of motive: Lifeline, mutual consent, resisted and indecent assault, which are based on the relations of co-operation and resistance between the two companies, lifeline being the most co-operative interface between acquiring and acquired firms and indecent assault the most adversarial.

1) Lifeline Here the situation is usually that the seller is experiencing financial difficulties presented by lack of capital or cash flow, which can be terminal. Another possibility for local companies is that the seller may be forced to address the requirements of black empowerment and employment equity in a timeframe unrealistic to the current life stage of their business, such that they cannot do so on their own.

Alternatively, it could just be that the company lacks the capability to continue to operate without fresh external input. Invariably, it comes down to the issue of money - companies require enough working capital so they can employ the necessary sales and support capability.

In this scenario, a company may seek a suitor, or a suitor may see the potential and pursue the company. Because of the financial challenges the business is facing, the seller may be too eager, and give away too much for too little. That eagerness often disappears once the honeymoon is over. When the business is back on track and performing well, and the rose-coloured lenses have been removed, the seller suddenly discovers the realities of having a shareholder who has control of an inordinate share, and/or a different set of expectations for the business.

The better the company does, the more the seller resents having surrendered so much. What is forgotten are the challenges the company faced at the time of the acquisition.

So even though this scenario is one of "lifeline", there are major risks confronting the newly formed entity. How well was the original owner running the business? Does the investor merely provide cash or is there a greater value-add? Most often investors only want to be strategically involved, and not operationally.

When the degree of willingness and keenness to bring in a saviour is too great, issues such as culture fit, strategic alignment and business intent are often sidelined. The investor may have stringent performance

criteria, and the seller may end up becoming more of an employee than an entrepreneur or business owner. The potential for relationship breakdown here is enormous, as is the resultant loss to the business and to its investors.

2) Mutual consent Most M&As are by mutual consent. Both parties are looking for a win-win situation in which their combined synergies can yield greater profit and business success for all involved. But the fact that a merger may be collaborative, and that the companies have a genuine interest in doing business with each other does not negate possible risks from a leadership and human capital perspective. The assumption that cooperation will occur simply because both parties are committed to the venture can result in insufficient communication and discussion that could help minimise risk.

With many consenting deals, the seller is often approached unexpectedly, while the buyer has set out with a clear set of objectives. This can add to the risk of the transaction, as it may not be thought through as meticulously as it should be. In this scenario, the seller may be led like a lamb to the slaughter.

Simultaneously, the acquiring company needs to look beyond cash flow, balance sheets and future projections to what makes the business successful. Success is dependent on the company's leadership, and the ability to retain the people who are key to the company's ongoing success. The motives for acquisition should be transparent to both parties: is the company being bought for its profits, intellectual property, or customer base?; and whether the business he is buying is peripheral or central to the acquiring company. Which of these constitutes the motives will determine the risk profile.

3) Resisted If there are a number of buyers, then the M&A is resisted. The risks here are high, as typically only one of the two parties has a strong interest in concluding the deal.

Take the Paracon bid to buy Software Futures as an example. What began as a deal of mutual consent became one of resistance based on price. The deal fell through as a consequence, although integration had been initiated, including at client level. Consider, for example, the impact of the opportunity cost on management.

In most resisted cases, the seller is the reluctant party and is usually unable to fend off eventual takeover. Because of this reluctance, the deal is likely to become more protracted, with a concomitant impact on people.

Rumours run rife, and insecurity becomes the order of the day. This type of merger activity is characterised by poor communication, largely because both parties are bound to confidentiality or because management is uncertain of the way forward. In this scenario, people feel as though they are living in limbo and attrition runs high.

4) Indecent assault This typically involves the acquisition of one company by another against its wishes. Often termed a hostile takeover, it is accomplished by buying controlling interest in the stock of the acquired company. An indecent assault might be motivated to eliminate competition, to sell off the assets of the company for more than the takeover payment, or to temporarily inflate the price of the stock. Oracle's Peoplesoft bid is a case in point.

In his book "After the Merger: The Authoritative Guide for Integration Success", Price Pritchett describes the risk curve and resistance incline eloquently - showing that the risk curve arcs from high in rescue situations, is moderate in collaborative mergers, and reaches a high point again in hostile situations.

Regardless of the type of M&A activity, the biggest risk to success and increased shareholder value remains the people management aspect. Recent studies point to the belief that human versus financialfactors are the primary cause of M&A failure. Several researchers have theorised specifically that employees from the acquired entity have a low level of commitment to the new organisation post-acquisition.

Both parties must think and plan ahead around the motivators for doing the deal and the direction they want to go. They must have a clear, mutually agreed vision and be able to offer their people a compelling future value proposition relating to the way forward.

M&A transactions can be characterized in a number of ways. These different characterizations

provide important context for discussions of the transaction process, regulatory compliance, and

the strategic and financial impact of the different types of transactions.

Mergers Versus Acquisitions

The term “merger” technically means the absorption of one corporation into another corporation.

Typically, in a merger, the selling corporation’s shareholders receive stock in the buying

corporation. However, the term “merger” is frequently used more loosely—for example, to

include a consolidation that is technically the combination of two or more corporations to form a

new corporation.

In a true merger (as opposed to an acquisition), the acquirer becomes directly liable for all the

liabilities of the acquired corporation, often an undesirable result. In a pure stock purchase or

acquisition, the acquired company can be kept as a separate subsidiary and, while its liabilities

continue to exist, they do not become legal claims against the assets or earnings of the acquirer.

However, assumption of liabilities by the acquirer can be avoided by a special structure known as

a triangular merger, in which the acquirer sets up a subsidiary and then merges it with the

acquired company.

Large Public Versus Small Private Acquisitions

Arguably, the most important distinction among types of acquisitions revolves around size.

Merger stat data confirms that a reasonable dividing line between large, public company

acquisitions and small, nonpublic acquisitions, as determined by magnitude of purchase price, is

$500 million. This is because the vast majority of transactions that are larger than $500 million

involve the sale of a public company, and those falling below that benchmark are sales of private

companies or divestitures of business units by larger companies.

This distinction is important because large transactions have dynamics and requirements that are

substantially different from those of smaller transactions, and those differences have a significant

impact on the acquisition process for each. These differences and their impact are briefly

described in the paragraphs that follow and are illustrated in the following chart:

Strategic Impact. Large public transactions are almost invariably transformational in nature. They

involve the combination of two large entities that can be expected to have strong positions in the

same or adjacent markets. Such combinations generally result in an entity of great size, with

substantially expanded product breadth and depth, market reach, and overall capabilities. In

contrast, smaller transactions are generally non-transformational in nature and fulfill important,

but limited, strategic objectives. While they may materially advance the strategic position of the

acquirer, they rarely are significant enough to transform the acquirer’s business.

Regulatory Requirements. The acquisition of a publicly traded company is heavily regulated by

the Securities and Exchange Commission (SEC), state law, and federal antitrust statutes,

specifically the Hart-Scott-Rodino (HSR) Act. Nonpublic transactions, in comparison, are minimally

regulated. However, those with a purchase price of more than $53 million (periodically adjusted

for inflation) may be subject to the provisions of the HSR. In any event, the greater the need for

regulatory compliance, the greater the need for additional expertise and resources and the

greater the length of time needed to execute the transaction.

Stock or Asset Purchases. As noted, when publicly traded companies are acquired, it is the shares

of those companies that are almost invariably purchased. As a result, all the liabilities of the

acquired company are assumed as well. Although the acquirer may be able to shield itself from

direct exposure to those liabilities, the acquired entity is still liable for all obligations known and

unknown to the acquirer. Frequently, in contrast, selected assets of nonpublic companies are

acquired, in lieu of stock. This may enable the buyer to pay for only those assets it truly wants

and to avoid assuming many of the target company’s liabilities.

Leverage of the Parties to the Transaction. In acquisitions of publicly traded companies, pricing

leverage will generally reside with the seller. Even as rumors that the target company is being

pursued by a suitor emerge, the value of its stock will invariably increase. This among other

factors will affect the negotiated price of the shares. If successful in executing a transaction, the

acquirer will pay a premium that historically has been within a range of from 30 to 40% above

the pre-acquisition price. In contrast, transaction leverage is generally tilted toward the buyer at

the small end of the market, particularly when the field of potential buyers is small. This has

significant implications regarding price as well as other major terms of the transaction.

Risk Profile of the Transaction. There is an inverse relationship to leverage and risk. Accordingly,

the risk profile of the acquisition of a publicly traded company is quite high. A large body of

research has been conducted that indicates that a high percentage of public transactions never

generate returns that would justify the price paid. This fact is generally attributable to two

factors: synergies generated from the combination are not sufficient to justify the purchase

premium paid, and the challenges of integration associated with a transaction of this magnitude

are frequently not fully anticipated, adequately prepared for, and effectively executed. In

addition, transaction risk is elevated because the acquirer has no recourse for breaches of

representations and warranties subsequent to the consummation of the transaction. Private

transactions generally allow for a much greater mitigation of risk. This includes measures such as

the ability to negotiate price and minimize premiums, the possibility to purchase only selected

assets, the ability in many cases to perform more intensive due diligence, and much greater

recourse in the case of breached representations and warranties. It is particularly noteworthy

that less than 10% of the transactions executed are those in which a publicly traded company is

purchased, with smaller, private transactions accounting for the rest. The differences cataloged

in the preceding paragraphs make it clear that transaction characteristics are strongly influenced

by the size and nature of the entity being acquired. They potentially impact most major aspects

of the acquisition process—ranging from negotiation of terms, to regulatory compliance,

financing, due diligence, and contract and close.

Strategic Versus Financial Acquisitions

The discussion to this point has focused on strategic acquisitions, those involving a buyer

motivated by strategic considerations, such as the objectives listed in the introductory section of

this chapter. However, when investment capital is plentiful, venture capital firms (i.e., financial

buyers, to be distinguished from strategic buyers) are very likely to become major competitors in

the acquisition arena. Rather than buy with the intent to build an enterprise for the long term,

these private equity firms acquire properties for the short to midterm and, after investing,

repositioning, and combining them with other synergistic assets, will resell them to strategic

buyers. Although the discussion herein is biased toward strategic acquisitions, many of the same

principles and procedures presented have equal application to financial acquisitions.

Portfolio Acquisitions Of Holding Companies

Acquisition-based holding companies buy companies in diverse industries, based more on the

quality of the company, its products, and its management than any overriding strategic approach

to a specific market.

Although more common in the 1960s, a time when the concept of the “conglomerate” was in

vogue, such organizations are relatively rare in the current environment. By definition, such

organizations make acquisitions with no expectation of realizing synergies and no intent to

integrate operations. The properties are generally acquired along with their management teams

and are run with the intent of building value over the long term. A notable (and extremely

successful) example of such an organization is Berkshire Hathaway, the company founded and

built by Warren Buffett.

Other Characterizations Of Acquisitions

Other characterizations of acquisitions cross the lines established by the distinctions just made.

There are “roll-up” strategies employed by both strategic and financial buyers wishing to expand

size and reach, and realize greater scale and efficiency, in a particular niche market. Similarly,

there are also “fold-in” strategies employed by buyers, whether strategic or financial, wishing to

fill gaps in their offerings by acquiring relatively small companies (or their assets) that can be

easily assimilated into the buyer’s operation, while shedding the support infrastructure of the

company being acquired.

Divestitures Versus Sales Of An Entire Business

It is important to distinguish between divestitures and sales of entire enterprises, because they

have substantially different transaction dynamics. Divestitures entail disposals of a segment of a

business such as a business unit, a product line, or even an individual product. They are made

either for strategic reasons or for financial reasons. In the case of the former, the unit being sold

is deemed by the parent company to no longer be compatible with its strategic direction and

therefore not a candidate for continued investment. In the latter case, the sale is invariably made

to generate needed cash and is generally executed by a parent that is under financial duress.

Further reading about Merger and acquisition (M&A

The Main Idea

One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The

key principle behind buying a company is to create shareholder value over and above that of the

sum of the two companies. Two companies together are more valuable than two separate

companies - at least, that's the reasoning behind M&A.

This rationale is particularly alluring to companies when times are tough. Strong companies will

act to buy other companies to create a more competitive, cost-efficient company. The companies

will come together hoping to gain a greater market share or to achieve greater efficiency.

Because of these potential benefits, target companies will often agree to be purchased when

they know they cannot survive alone.

Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous,

the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new owner, the

purchase is called an acquisition. From a legal point of view, the target company ceases to exist,

the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size,

agree to go forward as a single new company rather than remain separately owned and

operated. This kind of action is more precisely referred to as a "merger of equals." Both

companies' stocks are surrendered and new company stock is issued in its place. For example,

both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company,

DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one company

will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that

the action is a merger of equals, even if it's technically an acquisition. Being bought out often

carries negative connotations, therefore, by describing the deal as a merger, deal makers and

top managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the

best interest of both of their companies. But when the deal is unfriendly - that is, when the target

company does not want to be purchased - it is always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether the

purchase is friendly or hostile and how it is announced. In other words, the real difference lies in

how the purchase is communicated to and received by the target company's board of directors,

employees and shareholders.

Synergy

Synergy is the magic force that allows for enhanced cost efficiencies of the new business.

Synergy takes the form of revenue enhancement and cost savings. By merging, the companies

hope to benefit from the following:

Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the

money saved from reducing the number of staff members from accounting, marketing and other

departments. Job cuts will also include the former CEO, who typically leaves with a compensation

package.

Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT

system, a bigger company placing the orders can save more on costs. Mergers also translate into

improved purchasing power to buy equipment or office supplies - when placing larger orders,

companies have a greater ability to negotiate prices with their suppliers.

Acquiring new technology - To stay competitive, companies need to stay on top of technological

developments and their business applications. By buying a smaller company with unique

technologies, a large company can maintain or develop a competitive edge.

Improved market reach and industry visibility - Companies buy companies to reach new markets

and grow revenues and earnings. A merge may expand two companies' marketing and

distribution, giving them new sales opportunities. A merger can also improve a company's

standing in the investment community: bigger firms often have an easier time raising capital

than smaller ones.

That said, achieving synergy is easier said than done - it is not automatically realized once two

companies merge. Sure, there ought to be economies of scale when two businesses are

combined, but sometimes a merger does just the opposite. In many cases, one and one add up to

less than two.

Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal

makers. Where there is no value to be created, the CEO and investment bankers - who have

much to gain from a successful M&A deal - will try to create an image of enhanced value. The

market, however, eventually sees through this and penalizes the company by assigning it a

discounted share price. We'll talk more about why M&A may fail in a later section of this tutorial.

Varieties of Mergers

From the perspective of business structures, there is a whole host of different mergers. Here are

a few types, distinguished by the relationship between the two companies that are merging:

Horizontal merger - Two companies that are in direct competition and share the same product

lines and markets.

Vertical merger - A customer and company or a supplier and company. Think of a cone supplier

merging with an ice cream maker.

Market-extension merger - Two companies that sell the same products in different markets.

Product-extension merger - Two companies selling different but related products in the same

market.

Conglomeration - Two companies that have no common business areas.

There are two types of mergers that are distinguished by how the merger is financed. Each has

certain implications for the companies involved and for investors:

Purchase Mergers - As the name suggests, this kind of merger occurs when one company

purchases another. The purchase is made with cash or through the issue of some kind of debt

instrument; the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them with a tax

benefit. Acquired assets can be written-up to the actual purchase price, and the difference

between the book value and the purchase price of the assets can depreciate annually, reducing

taxes payable by the acquiring company. We will discuss this further in part four of this tutorial.

Consolidation Mergers - With this merger, a brand new company is formed and both companies

are bought and combined under the new entity. The tax terms are the same as those of a

purchase merger.

Acquisitions

As you can see, an acquisition may be only slightly different from a merger. In fact, it may be

different in name only. Like mergers, acquisitions are actions through which companies seek

economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all

acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation

as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal.

Other times, acquisitions are more hostile.

In an acquisition, as in some of the merger deals we discuss above, a company can buy another

company with cash, stock or a combination of the two. Another possibility, which is common in

smaller deals, is for one company to acquire all the assets of another company. Company X buys

all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if

they had debt before). Of course, Company Y becomes merely a shell and will eventually

liquidate or enter another area of business.

Another type of acquisition is a reverse merger, a deal that enables a private company to get

publicly-listed in a relatively short time period. A reverse merger occurs when a private company

that has strong prospects and is eager to raise financing buys a publicly-listed shell company,

usually one with no business and limited assets. The private company reverse merges into the

public company, and together they become an entirely new public corporation with tradable

shares.

Regardless of their category or structure, all mergers and acquisitions have one common goal:

they are all meant to create synergy that makes the value of the combined companies greater

than the sum of the two parts. The success of a merger or acquisition depends on whether this

synergy is achieved

Mergers and acquisitions

From Wikipedia, the free encyclopedia

"Merger" redirects here. For other uses, see Merge (disambiguation). For other uses of

"acquisition", see Acquisition (disambiguation).

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate

strategy, corporate finance and managementdealing with the buying, selling and combining of

different companies that can aid, finance, or help a growing company in a given industry grow

rapidly without having to create another business entity.

Look

up merger in Wiktiona

ry, the free dictionary.

Contents

 [hide]

1   Acquisition

o 1.1   Distinction between mergers and acquisitions

2   Business valuation

3   Financing M&A

o 3.1   Cash

o 3.2   Stock

o 3.3   Which method of financing to choose?

4   Specialist M&A advisory firms

5   Motives behind M&A

6   Effects on management

7   Brand considerations

8   The Great Merger Movement

o 8.1   Short-run factors

o 8.2   Long-run factors

o 8.3   Merger waves

o 8.4   Deal Objectives in More Recent Merger Waves

9   Cross-border M&A

10   Major M&A

o 10.1   1990s

o 10.2   2000s

11   M&A in Popular Culture

12   See also

13   References

14   Further reading

[edit]Acquisition

Main article: Takeover

An acquisition is the purchase of one company by another company. Consolidation is when two

companies combine together to form a new company altogether. An acquisition may be private

or public, depending on whether the acquiree or merging company is or isn't listed in public

markets. An acquisition may be friendly or hostile.

Whether a purchase is perceived as a friendly or hostile depends on how it is communicated to

and received by the target company's board of directors, employees and shareholders. It is quite

normal for M&A deal communications to take place in a so called 'confidentiality bubble' whereby

information flows are restricted due to confidentiality agreements (Harwood, 2005). In the case of

a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the

takeover target is unwilling to be bought or the target's board has no prior knowledge of the

offer. Hostile acquisitions can, and often do, turn friendly at the end, as the acquiror secures the

endorsement of the transaction from the board of the acquiree company. This usually requires an

improvement in the terms of the offer. Acquisition usually refers to a purchase of a smaller firm

by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger

or longer established company and keep its name for the combined entity. This is known as

a reverse takeover. Another type of acquisition is reverse merger, a deal that enables a private

company to get publicly listed in a short time period. A reverse merger occurs when a private

company that has strong prospects and is eager to raise financing buys a publicly listed shell

company, usually one with no business and limited assets. Achieving acquisition success has

proven to be very difficult, while various studies have shown that 50% of acquisitions were

unsuccessful.[citation needed] The acquisition process is very complex, with many dimensions

influencing its outcome.[1] There are also a variety of structures used in securing control over the

assets of a company, which have different tax and regulatory implications:

This section does not cite any references or sources.

Please help improve this article by adding citations to reliable sources.

Unsourced material may be challenged andremoved. (June 2008)

The buyer buys the shares, and therefore control, of the target company being

purchased. Ownership control of the company in turn conveys effective control over the

assets of the company, but since the company is acquired intact as a going concern, this

form of transaction carries with it all of the liabilities accrued by that business over its

past and all of the risks that company faces in its commercial environment.

The buyer buys the assets of the target company. The cash the target receives from the

sell-off is paid back to its shareholders by dividend or through liquidation. This type of

transaction leaves the target company as an empty shell, if the buyer buys out the entire

assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the

assets that it wants and leave out the assets and liabilities that it does not. This can be

particularly important where foreseeable liabilities may include future, unquantified

damage awards such as those that could arise from litigation over defective products,

employee benefits or terminations, or environmental damage. A disadvantage of this

structure is the tax that many jurisdictions, particularly outside the United States, impose

on transfers of the individual assets, whereas stock transactions can frequently be

structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral,

both to the buyer and to the seller's shareholders.

The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where

one company splits into two, generating a second company separately listed on a stock

exchange.

[edit]Distinction between mergers and acquisitions

Although often used synonymously, the terms merger and acquisition mean slightly different

things.[2] When one company takes over another and clearly establishes itself as the new owner,

the purchase is called an acquisition. From a legal point of view, the target company ceases to

exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms agree to go forward as a single

new company rather than remain separately owned and operated. This kind of action is more

precisely referred to as a "merger of equals". The firms are often of about the same size. Both

companies' stocks are surrendered and new company stock is issued in its place. For example, in

the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when

they merged, and a new company, GlaxoSmithKline, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one company

will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that

the action is a merger of equals, even if it is technically an acquisition. Being bought out often

carries negative connotations, therefore, by describing the deal euphemistically as a merger,

deal makers and top managers try to make the takeover more palatable. An example of this

would be the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a

merger at the time.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the

best interest of both of their companies. But when the deal is unfriendly (that is, when the target

company does not want to be purchased) it is always regarded as an acquisition.

[edit]Business valuation

The five most common ways to valuate a business are

asset valuation ,

historical earnings valuation,

future maintainable earnings valuation,

relative valuation  (comparable company & comparable transactions),

discounted cash flow  (DCF) valuation

Professionals who valuate businesses generally do not use just one of these methods but

a combination of some of them, as well as possibly others that are not mentioned above, in order

to obtain a more accurate value. The information in the balance sheet or income statement is

obtained by one of three accounting measures: a Notice to Reader, a Review Engagement or

an Audit.

Accurate business valuation is one of the most important aspects of M&A as valuations like these

will have a major impact on the price that a business will be sold for. Most often this information

is expressed in a Letter of Opinion of Value (LOV) when the business is being valuated for

interest's sake. There are other, more detailed ways of expressing the value of a business. While

these reports generally get more detailed and expensive as the size of a company increases, this

is not always the case as there are many complicated industries which require more attention to

detail, regardless of size.

[edit]Financing M&A

Mergers are generally differentiated from acquisitions partly by the way in which they are

financed and partly by the relative size of the companies. Various methods of financing an M&A

deal exist:

[edit]Cash

Payment by cash. Such transactions are usually termed acquisitions rather than mergers because

the shareholders of the target company are removed from the picture and the target comes

under the (indirect) control of the bidder's shareholders.

[edit]Stock

Payment in the acquiring company's stock, issued to the shareholders of the acquired company

at a given ratio proportional to the valuation of the latter.

[edit]Which method of financing to choose?

There are some elements to think about when choosing the form of payment. When submitting

an offer, the acquiring firm should consider other potential bidders and think strategic. The form

of payment might be decisive for the seller. With pure cash deals, there is no doubt on the real

value of the bid (without considering an eventual earnout). The contingency of the share

payment is indeed removed. Thus, a cash offer preempts competitors better than securities.

Taxes are a second element to consider and should be evaluated with the counsel of competent

tax and accounting advisers. Third, with a share deal the buyer’s capital structure might be

affected and the control of the New co modified. If the issuance of shares is necessary,

shareholders of the acquiring company might prevent such capital increase at the general

meeting of shareholders. The risk is removed with a cash transaction. Then, the balance sheet of

the buyer will be modified and the decision maker should take into account the effects on the

reported financial results. For example, in a pure cash deal (financed from the company’s current

account), liquidity ratios might decrease. On the other hand, in a pure stock for stock transaction

(financed from the issuance of new shares), the company might show lower profitability ratios

(e.g. ROA). However, economic dilution must prevail towards accounting dilution when making

the choice. The form of payment and financing options are tightly linked. If the buyer pays cash,

there are three main financing options:

- Cash on hand: it consumes financial slack (excess cash or unused debt capacity) and may

decrease debt rating. There are no major transaction costs.

- Issue of debt: it consumes financial slack, may decrease debt rating and increase cost of debt.

Transaction costs include underwriting or closing costs of 1% to 3% of the face value.

- Issue of stock: it increases financial slack, may improve debt rating and reduce cost of debt.

Transaction costs include fees for preparation of a proxy statement, an extraordinary shareholder

meeting and registration.

If the buyer pays with stock, the financing possibilities are:

- Issue of stock (same effects and transaction costs as described above).

- Shares in treasury: it increases financial slack (if they don’t have to be repurchased on the

market), may improve debt rating and reduce cost of debt. Transaction costs include brokerage

fees if shares are repurchased in the market otherwise there are no major costs.

In general, stock will create financial flexibility. Transaction costs must also be considered but

tend to have a greater impact on the payment decision for larger transactions. Finally, paying

cash or with shares is a way to signal value to the other party, e.g.: buyers tend to offer stock

when they believe their shares are overvalued and cash when undervalued. [3]

[edit]Specialist M&A advisory firms

Although at present the majority of M&A advice is provided by full-service investment banks,

recent years have seen a rise in the prominence of specialist M&A advisers, who only provide

M&A advice (and not financing). These companies are sometimes referred to as Transition

companies, assisting businesses often referred to as "companies in transition." To perform these

services in the US, an advisor must be a licensed broker dealer, and subject to SEC (FINRA)

regulation. More information on M&A advisory firms is provided at corporate advisory.

[edit]Motives behind M&A

The dominant rationale used to explain M&A activity is that acquiring firms seek improved

financial performance. The following motives are considered to improve financial performance:

Economy of scale : This refers to the fact that the combined company can often reduce its

fixed costs by removing duplicate departments or operations, lowering the costs of the

company relative to the same revenue stream, thus increasing profit margins.

Economy of scope : This refers to the efficiencies primarily associated with demand-side

changes, such as increasing or decreasing the scope of marketing and distribution, of

different types of products.

Increased revenue or market share: This assumes that the buyer will be absorbing a

major competitor and thus increase its market power (by capturing increased market

share) to set prices.

Cross-selling : For example, a bank buying a stock broker could then sell its banking

products to the stock broker's customers, while the broker can sign up the bank's

customers for brokerage accounts. Or, a manufacturer can acquire and sell

complementary products.

Synergy : For example, managerial economies such as the increased opportunity of

managerial specialization. Another example are purchasing economies due to increased

order size and associated bulk-buying discounts.

Taxation : A profitable company can buy a loss maker to use the target's loss as their

advantage by reducing their tax liability. In the United States and many other countries,

rules are in place to limit the ability of profitable companies to "shop" for loss making

companies, limiting the tax motive of an acquiring company. Tax minimization strategies

include purchasing assets of a non-performing company and reducing current tax liability

under the Tanner-White PLLC Troubled Asset Recovery Plan.

Geographical or other diversification: This is designed to smooth the earnings results of a

company, which over the long term smoothens the stock price of a company, giving

conservative investors more confidence in investing in the company. However, this does

not always deliver value to shareholders (see below).

Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the

interaction of target and acquiring firm resources can create value through either

overcoming information asymmetry or by combining scarce resources.[4]

Vertical integration : Vertical integration occurs when an upstream and downstream firm

merge (or one acquires the other). There are several reasons for this to occur. One reason

is to internalise an externality problem. A common example is of such an externality is

double marginalization. Double marginalization occurs when both the upstream and

downstream firms have monopoly power, each firm reduces output from the competitive

level to the monopoly level, creating two deadweight losses. By merging the vertically

integrated firm can collect one deadweight loss by setting the downstream firm's output

to the competitive level. This increases profits and consumer surplus. A merger that

creates a vertically integrated firm can be profitable.[5]

Absorption of similar businesses under single management: similar portfolio invested by

two different mutual funds (Ahsan Raza Khan, 2009) namely united money market fund

and united growth and income fund, caused the management to absorb united money

market fund into united growth and income fund.</ref>

However, on average and across the most commonly studied variables, acquiring firms' financial

performance does not positively change as a function of their acquisition activity.[6] Therefore,

additional motives for merger and acquisition that may not add shareholder value include:

Diversification: While this may hedge a company against a downturn in an individual

industry it fails to deliver value, since it is possible for individual shareholders to achieve

the same hedge by diversifying their portfolios at a much lower cost than those

associated with a merger. (In his book One Up on Wall Street, Peter Lynch memorably

termed this "diworseification".)

Manager's hubris: manager's overconfidence about expected synergies from M&A which

results in overpayment for the target company.

Empire-building : Managers have larger companies to manage and hence more power.

Manager's compensation: In the past, certain executive management teams had their

payout based on the total amount of profit of the company, instead of the profit per

share, which would give the team a perverse incentive to buy companies to increase the

total profit while decreasing the profit per share (which hurts the owners of the company,

the shareholders); although some empirical studies show that compensation is linked to

profitability rather than mere profits of the company.

[edit]Effects on management

A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that

mergers and acquisitions destroy leadership continuity in target companies’ top management

teams for at least a decade following a deal. The study found that target companies lose 21

percent of their executives each year for at least 10 years following an acquisition – more than

double the turnover experienced in non-merged firms.[7] If the businesses of the acquired and

acquiring companies overlap, then such turnover is to be expected; in other words, there can

only be one CEO, CFO, etcetera at a time...

[edit]Brand considerations

Mergers and acquisitions often create brand problems, beginning with what to call the company

after the transaction and going down into detail about what to do about overlapping and

competing product brands. Decisions about what brand equity to write off are not

inconsequential. And, given the ability for the right brand choices to drive preference and earn a

price premium, the future success of a merger or acquisition depends on making wise brand

choices. Brand decision-makers essentially can choose from four different approaches to dealing

with naming issues, each with specific pros and cons:[8]

1. Keep one name and discontinue the other. The strongest legacy brand with the best

prospects for the future lives on. In the merger ofUnited Airlines and Continental Airlines,

the United brand will continue forward, while Continental is retired.

2. Keep one name and demote the other. The strongest name becomes the company name

and the weaker one is demoted to a divisional brand or product brand. An example

is Caterpillar Inc. keeping the Bucyrus International name.[9]

3. Keep both names and use them together. Some companies try to please everyone and

keep the value of both brands by using them together. This can create a unwieldy name,

as in the case of PricewaterhouseCoopers, which has since changed its brand name to

"PwC".

4. Discard both legacy names and adopt a totally new one. The classic example is the

merger of Bell Atlantic with GTE, which becameVerizon Communications. Not every

merger with a new name is successful. By consolidating into YRC Worldwide, the company

lost the considerable value of both Yellow Freight and Roadway Corp.

The factors influencing brand decisions in a merger or acquisition transaction can range from

political to tactical. Ego can drive choice just as well as rational factors such as brand value and

costs involved with changing brands.[10]

Beyond the bigger issue of what to call the company after the transaction comes the ongoing

detailed choices about what divisional, product and service brands to keep. The detailed

decisions about the brand portfolio are covered under the topic brand architecture.

[edit]The Great Merger Movement

The Great Merger Movement was a predominantly U.S. business phenomenon that happened

from 1895 to 1905. During this time, small firms with little market share consolidated with similar

firms to form large, powerful institutions that dominated their markets. It is estimated that more

than 1,800 of these firms disappeared into consolidations, many of which acquired substantial

shares of the markets in which they operated. The vehicle used were so-called trusts. In 1900 the

value of firms acquired in mergers was 20% of GDP. In 1990 the value was only 3% and from

1998–2000 it was around 10–11% of GDP. Organizations that commanded the greatest share of

the market in 1905 saw that command disintegrate by 1929 as smaller competitors joined forces

with each other. However, there were companies that merged during this time such

as DuPont, US Steel, and General Electric that have been able to keep their dominance in their

respective sectors today due to growing technological advances of their products, patents,

and brand recognition by their customers. The companies that merged were mass producers of

homogeneous goods that could exploit the efficiencies of large volume production. However

more often than not mergers were "quick mergers". These "quick mergers" involved mergers of

companies with unrelated technology and different management. As a result, the efficiency gains

associated with mergers were not present. The new and bigger company would actually face

higher costs than competitors because of these technological and managerial differences. Thus,

the mergers were not done to see large efficiency gains, they were in fact done because that was

the trend at the time. Companies which had specific fine products, like fine writing paper, earned

their profits on high margin rather than volume and took no part in Great Merger Movement.[citation

needed]

[edit]Short-run factors

One of the major short run factors that sparked in The Great Merger Movement was the desire to

keep prices high. That is, with many firms in a market, supply of the product remains high.

During the panic of 1893, the demand declined. When demand for the good falls, as illustrated by

the classic supply and demand model, prices are driven down. To avoid this decline in prices,

firms found it profitable to collude and manipulate supply to counter any changes in demand for

the good. This type of cooperation led to widespread horizontal integration amongst firms of the

era. Focusing on mass production allowed firms to reduce unit costs to a much lower rate. These

firms usually were capital-intensive and had high fixed costs. Because new machines were mostly

financed through bonds, interest payments on bonds were high followed by the panic of 1893,

yet no firm was willing to accept quantity reduction during that period.[citation needed]

[edit]Long-run factors

In the long run, due to the desire to keep costs low, it was advantageous for firms to merge and

reduce their transportation costs thus producing and transporting from one location rather than

various sites of different companies as in the past. This resulted in shipment directly to market

from this one location. In addition, technological changes prior to the merger movement within

companies increased the efficient size of plants with capital intensive assembly lines allowing for

economies of scale. Thus improved technology and transportation were forerunners to the Great

Merger Movement. In part due to competitors as mentioned above, and in part due to the

government, however, many of these initially successful mergers were eventually dismantled.

The U.S. government passed the Sherman Act in 1890, setting rules againstprice fixing and

monopolies. Starting in the 1890s with such cases as U.S. versus Addyston Pipe and Steel Co.,

the courts attacked large companies for strategizing with others or within their own companies to

maximize profits. Price fixing with competitors created a greater incentive for companies to unite

and merge under one name so that they were not competitors anymore and technically not price

fixing.

[edit]Merger waves

The economic history has been divided into Merger Waves based on the merger activities in the

business world as:

Period Name Facet

1897–

1904First Wave Horizontal mergers

1916–

1929

Second

WaveVertical mergers

1965–

1969Third Wave Diversified conglomerate mergers

1981–

1989

Fourth

Wave

Congeneric mergers; Hostile takeovers; Corporate

Raiding

1992-

2000Fifth Wave Cross-border mergers

[11]

[edit]Deal Objectives in More Recent Merger Waves

During the third merger wave (1965-1989), corporate marriages involved more diverse

companies. Acquirers more frequently bought into different industries. Sometimes this was done

to smooth out cyclical bumps, to diversify, the hope being that it would hedge an investment

portfolio.

Starting in the fourth merger wave (1992-1998) and continuing today, companies are more likely

to acquire in the same business, or close to it, firms that complement and strengthen an

acquirer’s capacity to serve customers.

Buyers aren’t necessarily hungry for the target companies’ hard assets. Now they’re going after

entirely different prizes. The hot prizes aren’t things—they’re thoughts, methodologies, people

and relationships. Soft goods, so to speak.

Many companies are being bought for their patents, licenses, market share, name brand,

research staffs, methods, customer base, or culture. Soft capital, like this, is very perishable,

fragile, and fluid. Integrating it usually takes more finesse and expertise than integrating

machinery, real estate, inventory and other tangibles. [12]

[edit]Cross-border M&A

In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A

deals cause the domestic currency of the target corporation to appreciate by 1% relative to the

acquirers.

The rise of globalization has exponentially increased the necessity for MAIC Trust accounts and

securities clearing services for Like-Kind Exchanges for cross-border M&A. In 1997 alone, there

were over 2333 cross-border transactions, worth a total of approximately $298 billion. Due to the

complicated nature of cross-border M&A, the vast majority of cross-border actions have

unsuccessful anies seek to expand their global footprint and become more agile at creating high-

performing businesses and cultures across national boundaries.[13]

Even mergers of companies with headquarters in the same country are very much of this type

and require MAIC custodial services (cross-border Mergers). After all, when Boeing acquires

McDonnell Douglas, the two American companies must integrate operations in dozens of

countries around the world. This is just as true for other supposedly "single country" mergers,

such as the $29 billion dollar merger of Swiss drug makers Sandoz and Ciba-Geigy (now

Novartis).

[edit]Major M&A

[edit]1990s

Top 10 M&A deals worldwide by value (in mil. USD) from 1990 to 1999:

Ran

k

Yea

rPurchaser Purchased

Transaction value (in mil.

USD)

1199

9

Vodafone Airtouch

PLC [14] Mannesmann 183,000

2199

9Pfizer [15] Warner-Lambert 90,000

3199

8Exxon [16] [17] Mobil 77,200

4199

8Citicorp Travelers Group 73,000

5199

9SBC Communications Ameritech Corporation 63,000

6199

9Vodafone Group

AirTouch

Communications60,000

7199

8Bell Atlantic [18] GTE 53,360

8199

8BP [19] Amoco 53,000

9199

9

Qwest

CommunicationsUS WEST 48,000

10199

7Worldcom MCI Communications 42,000

[edit]2000s

Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2009:

Ran

k

Yea

rPurchaser Purchased

Transaction value (in

mil. USD)

1200

0

Fusion: America Online Inc.

(AOL)[20][21]Time Warner 164,747

2200

0Glaxo Wellcome Plc. SmithKline Beecham Plc. 75,961

3200

4Royal Dutch Petroleum Co.

Shell Transport & Trading

Co74,559

4200

6AT&T Inc.[22][23] BellSouth Corporation 72,671

5200

1Comcast Corporation

AT&T Broadband &

Internet Svcs72,041

6200

9Pfizer Inc. Wyeth 68,000

7200

0

Spin-off: Nortel Networks

Corporation59,974

8200

2Pfizer Inc. Pharmacia Corporation 59,515

9200

4JP Morgan Chase & Co[24] Bank One Corp 58,761

10200

8Inbev Inc.

Anheuser-Busch

Companies, Inc52,000

[edit]M&A in Popular Culture

In the novel American Psycho the protagonist Patrick Bateman, played by Christian Bale in

the film adaptation, works in mergers and acquisitions, which he occasionally refers to as

'murders and executions' to his unwitting victims. The character also enjoys Genesis albums and

competing with colleagues on who has the best business card.

Joint ventureFrom Wikipedia, the free encyclopedia

For other uses, see Joint Venture (disambiguation).

This article may require cleanup to meet Wikipedia's quality standards. Please improve this article if you can. The talk page may contain suggestions. (April 2010)

This article may need to be wikified to meet Wikipedia's quality standards. Please help by adding relevant internal links, or by improving the article's layout. (October 2010)

This article needs additional citations for verification.Please help improve this article by adding reliable references. Unsourced material may be challenged and removed.(October 2010)

This article may require copy editing for grammar, style, cohesion, tone, or spelling. You can assist by editing it. (October 2010)

The JV parties agree to develop, for a finite time, a new entity and new assets by

contributing equity. They both exercise control over theenterprise and consequently share

revenues, expenses and assets. There are other types of companies such as JV limited by

guarantee, joint ventures limited by guarantee with partners holding shares.

In European law, the term 'joint-venture' is an elusive legal concept, better defined under the

rules of company law. In France, the term 'joint venture' is variously translated as 'association

d'entreprises', 'entreprise conjointe', 'co-entreprise' and 'entreprise commune'. But generally, the

term societe anonyme loosely covers all foreign collaborations. In Germany,'joint venture' is

better represented as a 'combination of companies' (Konzern)[1]

On the other hand, when two or more persons come together to form a temporary

partnership for the purpose of carrying out a particular project, such partnership can also be

called a joint venture where the parties are "co-venturers".

The venture can be for one specific project only - when the JV is referred more correctly as

a consortium (as the building of the Channel Tunnel) - or a continuing business relationship.

The consortium JV (also known as a cooperative agreement) is formed where one party seeks

technological expertise or technical service arrangements, franchise and brand use

agreements, management contracts, rental agreements, for ‘‘one-time’’ contracts. The JV is

dissolved when that goal is reached.

Some major joint ventures include Dow Corning, MillerCoors, Sony Ericsson and Penske Truck

Leasing.

Contents

 [hide]

1 The Joint-Venture concept

o 1.1 Strategic reasons of one partner

o 1.2 Downsides of a JV

o 1.3 JVs and game theory

2 Finding the JV idea or partners

3 Formulating the JV

4 Selecting the partner

5 Feasibility study

6 Incorporation of the company

7 Shareholders' agreement

8 Joint venture laws of China

o 8.1 Equity JVs

o 8.2 Co-operative joint ventures

o 8.3 Wholly Foreign Owned Enterprises (WFOEs)

o 8.4 Foreign Investment Companies Limited By Shares (FICLBS)

o 8.5 Investment Companies by Foreign Investors (ICFI)

9 Joint-Ventures in India

o 9.1 Introduction

o 9.2 Liberalization of policy

o 9.3 Automatic licensing and administered licensing

o 9.4 Joint venture companies

o 9.5 Royalty payments and capitalization

o 9.6 Legal system in the country

o 9.7 Articles of Association

10 Dissolution

11 See also

12 References

13 External links

[edit]The Joint-Venture concept

A JV on a continuing basis is the normal business undertaking. It is similar to a business

partnership with two differences: the first, a partnership generally involves an ongoing, long-term

business relationship, whereas an equity-based JV comprises a single business activity.

Second, all the partners have to agree to dissolve the partnership whereas a finite time has to

lapse before it comes to an end (or is closed by the Court due to a dispute).

The term JV refers to the purpose of the entity and not to a type of entity. Therefore, a joint

venture may be a corporation, a limited liability enterprise, a partnership or other legal structure,

depending on a number of considerations such as tax and tort liability.

JVs are normally formed both inside one's own country and between firms belonging to different

countries. JVs are usually formed in order to combine strengths or to bypass legal restrictions

within a country; for example an insurance company cannot market its policies through a

banking company. Some JVs are also formed because the law of a country allows dispute

settlement, should it occur, in a third country. They are also formed to minimize business,tax

and political risks. The JV is an alternative to the parent-subsidiary business partnership in

emerging countries, discouraged, on account of (a) ignoring national objectives (b) slow-growth

(c) parental control of funds and (d) disallowing competition.

JVs can be in the manufacture of goods, services, travel space, banking, insurance, web-

hosting business, etc.

Today, the term 'JV' applies to more occasions than the choice of JV partners; for example, an

individual normally cannot legally carry out business without finding a national partner to form a

JV as in many Arab countries[2] where it is mentioned that there are over 500 Indian JVs in

Saudi Arabia. Also, the JV may be an easier first-step to franchising, as McDonald's and other

fast foods found out in China in the early difficult stage of development.

Other reasons for forming a JV are:

reducing 'entry' risks by using the local partner's assets

inadequate knowledge of local institutional or legal environment

access to local borrowing powers

perception that the goodwill of the local partner is carried forward

in strategic sectors, the county's laws may not permit foreign nationals to operate alone

access to local resources through participation of national partner

influence of local partners on government officials or 'compulsory' requisite (see China

coverage below)

access by one partner to foreign technology or expertise, often a key consideration of local

parties (or through government incentives for the mechanism)

again, through government incentives, job and skill growth through foreign investment, and

incoming foreign exchange and investment.

[edit]Strategic reasons of one partner

There may be strategic interests of one partner's alone:

adding 'clout' (the influence of the other partner) to the enterprise

build on company's strengths

economies of (international) scale and advantages of size ('industrial hubs')

'globalize' without size economies of scale (e.g.Indian and Israeli pharmaceutical industries)

influencing structural evolution of the industry

pre-empting competition

defensive response to blurring industry boundaries

speed to market

market diversification

pathways into R&D

outsourcing

JVs are formed by the parties’ entering into an agreement that specifies their mutual

responsibilities and goals in an 'adventure. The JV partners can usually form the capital of the

company through injections of cash alone or cash together with assets such as 'technology' or

land and buildings. Subsequent to its formation the JV can raise debt for additional capital. A

written contract is crucial for legal provisions. All JVs also involve certain rights and duties. Each

partner to the JV has a fiduciary responsibility, even to act on someone’s behalf, subordinating

one's personal interests to those of the other person or that of the ‘sleeping partner’. Upon its

incorporation (see later) it becomes a company in most places, or a corporation (in the US).

[edit]Downsides of a JV

Some of the downsides of a joint venture may be:[3]

differing philosophies governing expectations and objectives of the JV partners

an imbalance in the level of investment and expertise brought to the JV by the two parent

organizations

inadequate identification, support, and compensation of senior leadership and management

teams or

conflicting corporate cultures and operational styles of the JV partners

A JV can terminate at a time specified in the contract, upon the death of an active member

(unusual) or if a court so decides in a dispute taken to it.

Joint ventures have existed for many years in the US, from their usage in the railroad industry

(one party controls the sources of oil and the other party the rights of ferrying it) and even to

manufacturing and services. In the financial services industry JVs were widely employed for

marketing products or services that one of the parties, which acting alone, would have

been legally prohibited from doing so.[4]

[edit]JVs and game theory

JVs may also be formed by companies on the 'game theory' that is grounded on the perception

that of the many possible moves 'on the chessboard', a competitor cannot properly guess the

motive of the JV [5].

[edit]Finding the JV idea or partners

In the era of the Internet, finding opportunities for exploiting an idea is sizeable together with

remote, or advertised, communicating. There are also the blogging networks as well the social

networking sites and search engines. There are also other venues to find a JV partner such as

seminars, exhibitions, directories, websites such as http://www.clickbank.com/index.html and

the plain newspaper advertising of opportunities. One should not forget websites which have

become prosperous like eBay and Amazon.com, Wikipedia, Youtube to name the most obvious.

Forming JVs with distributor and marketing agencies is possible in this flat world to market a

product. But finding an entrepreneur for a JV is another task!

Nonetheless, there are risk-takers- Venture capitalists, angel investors and venture managers

(See Carried Interest [6] - especially in the high-tech industries like IC chips or biotechnology.

Although they typically exit once an idea or an opportunity proves itself, there are watchful funds

and investors who could go in for a JV.

Joint ventures have also become more prominent in the world of alternative investments since

the financial crisis began in 2007. In anOpalesque.TV video, Tim Krochuk of hedge fund GRT

Capital Partners describes how hedge funds have begun teaming up with traditional long-only

asset managers in joint ventures to provide alternative capabilities to existing traditional asset

management firms. The emergence of these joint ventures continues the trend of alternative

investments becoming a larger piece of traditional portfolios.

[edit]Formulating the JV

Formulating the JV is a series of steps, one which needs a lot of work and yet, at the same time,

precision. One can here only underline the steps or information that will be needed by the JV

candidate. They are [7]

the objectives, structure and projected form of the joint venture, including the amount of

investment and financing arrangements and debt

the JV(s) products , their technical description and usage

alternate production technologies

estimated cost of equipment

estimated product price(s)

costing

market analysis for the product, inside and outside the ‘territory’

analysis of competition

projected sales and methods of distribution

details of offered site, including output projections, transport and warehousing, testing and

quality control, by-products and waste;- supply, utility, and transport requirements;

estimated technology transfer costs

foreign exchange projections ( where applicable)

staff requirements and training

financial projections

environmental impact

social benefit

[edit]Selecting the partner

While the following offers some insight to the process of joining up with a committed partner to

form a JV, it is often difficult to determine whether the commitments come from a known and

distinguishable party or an intermediary. This is particularly so when the language barrier exists

and one is unfamiliar with local customs, especially in approaches to Government, often the

deciding body for the formation of a JV or dispute settlement.

The ideal process of selecting a JV partner emerges from:

screening of prospective partners

short listing a set of prospective partners and some sort of ranking

‘due diligence’ - checking the credentials of the other party

availability of appreciated or depreciated property contributed to the joint venture

the most appropriate structure and invitation/bid

foreign investor buying an interest in a local company

Companies are also called JVs in cases where there are dominant partners together with

participation of the public. There may also be cases where the public shareholding is substantial

but the founding partners retain their identity. These companies may be 'public' or 'private'

companies. It would be out of place to describe them, except to say there are many in India.

Further consideration relates to starting an new legal entity ground up. Such an enterprise is

sometimes called 'an incorporated JV', one 'packaged' with technology contracts

(knowhow,patents,trademarks and copyright), technical services and assisted-supply

arrangements.

The consortium JV (also known as a cooperative agreement) is formed where one party seeks

technological expertise or technical service arrangements, franchise and brand use

agreements, management contracts, rental agreements, f or 'one-time' contracts, e.g., for

construction projects. They dissolve the JV when that goal is reached.

[edit]Feasibility study

A nascent JV project outlines:

the partners

the objectives and structure of the JV

investment and financing arrangements

product(s)and description and usage, output

production technology

equipment required and costs

technology transfer costs

cost-benefit analysis

market analysis

analysis of competition

details of the site

transport and warehousing

by-products and waste

supply, utility, and transport requirements

foreign exchange projections

staff requirements and training

Its feasibility, besides its profitability,is assessed (in terms of Government control over the JV)

by considering it, along with the Articles which will regulate it, by its strength and weakness

factors (for the economy or the country) in aspects as:

the quality of the technology - its appropriateness to the national infrastructure, exports, etc

value to national economy and other contributions (i.e.labor intensity, environment factors,

utility usage, "greeness" of the technology), waste-treatment and disposal

capability of recipient to absorb the technology

cost of the technology and competitiveness

supporting strengths (trademarks, patents, know-how,copyrights in case of IT)

limits imposed (by its supplier) on the use or non-use of the technology.

[edit]Incorporation of the company

A JV can be brought about in the following major ways:

Foreign investor buying an interest in a local company

Local firm acquiring an interest in an existing foreign firm

Both the foreign and local entrepreneurs jointly forming a new enterprise

Together with public capital and/or bank debt

In the U.K and India - and in many Common Law countries - a joint-venture(or else a company

formed by a group of individuals)must file with the appropriate authority the Memorandum of

Association. It is a statutory document which informs the outside public of its existence. It may

be viewed by the public at the office in which it is filed. A sample can be seen

athttp://upload.wikimedia.org/wikipedia/meta/5/5f/Wikimedia_UK_-

_Memorandum_of_Association.pdf. Together with the Articles of Association, it forms the

'constitution' of a company in these countries.

The Articles of Association regulate the interaction between shareholders and the Directors of a

company and can be a lengthy document of up to 700000 + pages. It deals with the powers

relegated by the stockholders to the Directors and those withheld by them, requiring the passing

of Ordinary resolutions, Special resolutions and the holding of Extraordinary General

Meetings to bring the Directors' decision to bear.

A Certificate of Incorporation [8]  or the Articles of Incorporation ( see sample at [9] ) is a document

required to form a corporation in the US ( in actuality, the State where it is incorporated) and in

countries following the practice. In the US, the 'constitution' is a single document. The Articles of

Incorporation is again a regulation of the Directors by the stock-holders in a company.

By its formation the JV becomes a new entity with the implication:

that it is officially separate from its Founders, who might otherwise be giant corporations,

even amongst the emerging countries

the JV can contract in its own name, acquire rights (such as the right to buy new

companies), and

it has a separate liability from that of its founders, except for invested capital

it can sue (and be sued) in courts in defense or its pursuance of its objectives.

On the receipt of the Certificate of Incorporation a company can commence its business.

[edit]Shareholders' agreement

This is a legal area and is fraught with difficulty as the laws of countries differ, particularly on the

enforceability of 'heads of' or shareholder agreements. For some legal reasons it may be called

a Memorandum of Understanding. It is done in parallel with other activities in forming a JV.

Though dealt with briefly in shareholders’ agreement in Wikipedia, (also see samples in [10],[11])

some issues must be dealt with here as a preamble to the discussion that follows. There are

also many issues which are not in the Articles when a company starts up or never ever present.

Also, a JV may elect to stay as a JV alone in a ‘quasi partnership’ to avoid any nonessential

disclosure to the Government or the public.

Some of the issues in a shareholders' agreement are:

Valuation of intellectual rights, say,the valuations of the IPR of one partner and ,say, the real

estate of the other

the control of the Company either by the number of Directors or its "funding"

The number of directors and the rights of the founders to their appoint Directors which

shows as to wether a shareholder dominates or shares equality.

management decisions - whether the board manages or a founder

transferability of shares - assignment rights of the founders to other members of the

company

dividend policy - percentage of profits to be declared when there is profit

winding up - the conditions,notice to members

confidentiality of know-how and founders' agreement and penalties for disclosure

first right of refusal - purchase rights and counter-bid by a founder.

There are many features which have to be incorporated into the Shareholders Agreement which

is quite private to the parties as they start off. Normally, it requires no submission to any

authority.

The other basic document which must be articulated is the Articles which is a published

document and known to members.

This repeats the Shareholders Agreement as to the number of Directors each founder can

appoint to the (see Board of Directors). Whether the Board controls or the Founders. The taking

of decisions by ‘simple’ majority of those present or a 51% or 75% majority with all Directors

present (their Alternates/proxy); the deployment of funds of the firm; extent of debt; the

proportion of profit that can be declared as dividends; etc. Also significant is what will happen if

the firm is dissolved; one of the partner dies. Also, the ‘first right’ of refusal if the firm is sold,

sometimes its ‘puts’ and ‘calls’.

Often the most successful JVs are those with 50:50 partnership with each party having the

same number of Directors but rotating control over the firm, or rights to appoint the Chairperson

and Vice-chair of the Company. Sometimes a party may give a separate trusted person to vote

in its place proxy vote of the Founder at Board Meetings. (See also [12] )

Recently, in a major case the Indian Supreme Court has held that Memorandums of

Understanding (whose details are not in the Articles of Association) are "unconstitutional" giving

more transparency to undertakings.

[edit]Joint venture laws of China

It is interesting to study the JV laws of China because they are of recent vintage and because

such a unique law exists.

According to a report of the United Nations’ Conference on Trade and Development 2003,

China was the recipient of US$ 53.5 billion in direct foreign investment, making it the world’s

largest recipient of direct foreign investment for the first time, to exceed the USA. Also, it

approved the establishment of near 500,000 foreign investment enterprises.[13]. The US had

45000 projects ( by 2004) with an in-place investment of over 48 billion [14]

Until 1949, no guidelines existed on how foreign investment was to be handled due to the

restrictive nature of China toward foreign investors. Since Mao Zedong initiatives in foreign

trade began to be applied, and Law applicable to foreign direct investment was made clear in

1979, The first Sino-foreign equity venture took place in 2001 .[15] The corpus of the law has

improved since then.

Companies with foreign partners can carry out manufacturing and sales operations in China and

can sell through their own sales network. Foreign-Sino Companies have export rights which are

not available to wholly-Chinese companies as China desires to import foreign technology by

encouraging JVs and the latest technologies. Under Chinese law, foreign enterprises are

divided into several basic categories. Of these five will be described or mentioned here: three

relate to industry and services and two as vehicles for foreign investment.

They are the Sino-Foreign Equity Joint Ventures EJVs) ,Sino-Foreign Co-operative Joint

Ventures (CJVs), the Law pertaining to Wholly Foreign-Owned Enterprises (WFOE) (although

they do not strictly belong to Joint Ventures) and the Investment Laws pertaining to foreign

investment companies limited by shares (FICLBS) and Investment Companies through Foreign

Investors (ICFI).

[edit]Equity JVs

The EJV Law is between a Chinese partner and a foreign company. It is incorporated in both

Chinese (official) and in English (with equal validity), with limited liability. Prior to China’s entry

into WTO – and thus the WFOEs – EJVs predominated. In the EJV mode, the partners share

profits, losses and risk in equal proportion to their respective contributions to the venture’s

registered capital. These escalate upwardly in the same proportion as the increase in registered

capital.

The JV contract accompanied by the Articles of Association for the EJV are the two most

fundamental legal documents of the project. The Articles mirror many of the provisions of the JV

contract. In case of conflict the JV document has precedence These documents are prepared at

the same time as the feasibility report. There are also the ancillary documents (termed "offsets"

in the US) covering know-how and trade-marks and supply of equipment agreements.

The minimum equity is prescribed for investment (truncated) [16] (also see [17]:

Where the foreign equity and debt levels are:

less than US$3million, equity must constitute 70% of the investment;

more than US$3 million, but less than US$10 million, equity must constitute at least 50% of

the investment;

more than US$10 million but less than US$30 million, 40% must be equity; and

more than US$30 million, 33% of the investment must be equity.

There are also intermediary levels.

The foreign investment in the total project must be at least 25%. No minimum investment is set

for the Chinese partner. The ‘timing’ of investments must be mentioned in the Agreement and

failure to invest in the indicated time, draws a penalty.

[edit]Co-operative joint ventures

Co-operative Joint Ventures (CJVs) [18] are permitted under the Sino-Foreign Co-operative Joint

Ventures. Co-operative Enterprises are also called Contractual Operative Enterprises.

The CJVs may have a limited structure or unlimited – therefore, there are two versions. The

limited liability version is similar to the EJVs in status of permissions - the foreign investor

provides the majority of funds and technology and the Chinese party provides land, buildings,

equipment, etc. However, there are no minimum limits on the foreign partner which allows him

to be a minority shareholder.

The other format of the CJV is similar to a partnership where the parties jointly incur unlimited

liability for the debts of the enterprise with no separate legal person being created. In both the

cases, the status of the formed enterprise is that of a legal Chinese person which can hire labor

directly as, for example, a Chinese national contactor. The minimum of the capital is registered

at various levels of investment.

Other differences from the EJV are to be noted:

A Co-operative JV does not have to be a legal entity.

The partners in a CJV are allowed to share profit on an agreed basis, not necessarily in

proportion to capital contribution. This proportion also determines the control and the risks of

the enterprise in the same proportion.

it may be possible to operate in a CJV in a restricted area

a CJV could allow negotiated levels of management and financial control, as well as

methods of recourse associated with equipment leases and service contracts. In an EJV

management control is through allocation of Board seats [19].

during the term of the venture, the foreign participant can recover his investment, provided

the contract prescribes that and all fixed assets will become the property of the Chinese

participant on termination of the JV.

foreign partners can often obtain the desired level of control by negotiating management,

voting, and staffing rights into a CJV's Articles; since control does not have to be allocated

according to equity stakes.

Convenience and flexibility are the characteristics of this type of investment. It is therefore

easier to find co-operative partners and to reach an agreement.

With changes in the Law, it becomes possible to merge with a Chinese company for a quick

start. A foreign investor does not need to set up a new corporation in China. He uses the

Chinese partner’s business license, under a contractual arrangement. Under the CJV, however,

the land stays in the possession of the Chinese partner

There is another advantage: the percentage of the CJV owned by each partner can change

throughout the JV’s life, giving the option tot the foreign investor, by holding higher equity,

obtains a faster rate of return with the concurrent wish of the Chinese partner of a later larger

role of maintaining long term control

The parties in any of the ventures, EJV, CJV or WFOE prepare a feasibility study outlined

above. It is a non-binding document - the parties are still free to choose not to proceed with the

project. The feasibility study must cover the fundamental technical and commercial aspects of

the project before the parties can proceed to formalize the necessary legal documentation. The

study must contain details referred to earlier under Feasibility Study.[20] (submissions by the

Chinese partner).

[edit]Wholly Foreign Owned Enterprises (WFOEs)

The basic Law of the PRC Concerning Enterprises with Sole Foreign Investment controls

WFOEs. China’s entry into the World Trade Organization around 2001 has had profound effect

on foreign investment. Not being a JV, they are only considered here only in comparison or

contrast.

To implement WTO commitments, China publishes from time to time updated versions of {|

class="wikitable" |-its ‘Catalogs for the Guidance of Investments’ (affecting all ventures) - the

areas in which investment which is prohibited, encouraged and restricted. All foreign

investments which are absent in the list are permitted.

The WFOE is a Chinese legal person and has to obey all Chinese laws. As such, it is allowed to

enter into contracts with appropriate government authorities to acquire land use rights, rent

buildings, and receive utility services. In this it is more similar to a CJV than an EJV.

WFOEs are expected by PRC to use the most modern technologies and to export at least 50%

of their production, with all of the investment is to be wholly provided by the foreign investor and

the enterprise is within his total control.

WFOEs are typically limited liability enterprises (like with EJVs) but the liability of the Directors,

Managers, Advisers, and Suppliers depends on the rules which govern the Departments or

Ministries which control product liability, worker safety or environmental protection.

An advantage the WFOE enjoys over its alternates is the protection to its know-how but a

principal disadvantage is absence of an interested and influential Chinese party.

As of the 3rd Quarter 2004 the WFOEs had replaced EJVs and CJVs as follows [21] :

Distribution Analysis of JV in Industry - PRC

Type JV2000

2001 20022003

2004 (3Qr)

WFOE 46.9 50.3 60.2 62.4 66.8

EJV,% 35.8 34.7 20.4 29.6 26.9

CJV,% 15.9 12.9 9.6 7.2 5.2

Misc JV* 1.4 2.1 1.8 1.8 1.1

CJVs (No.)**1735

1589 15951547

996

(*)=Financial Ventures by EJVs/CJVs (**)=Approved JVs

[edit]Foreign Investment Companies Limited By Shares (FICLBS)

These enterprises are formed under the Sino-Foreign Investment Act . The capital is composed

of value of stock in exchange for the value of the property given to the enterprise. The liability of

the shareholders, including debt, is equal to the amount of shares purchased by each partner.

The registered capital of the company the share of the paid-in capital. The minimum amount of

the registered capital of the company should be RMB 30 million. These companies can be listed

on the only two PRC Stock Exchanges – the Shangri and Shenzhen Stock Exchanges. Shares

of two types are permitted on these Exchanges – Types “A” and Type “B” shares.

Type A are only to be used by Chinese nationals and can be traded only in RMB. Type “B”

shares are denominated in Remembi but can be traded in foreign exchange and by Chinese

nationals having foreign exchange. Further, State enterprises which have been approved for

corporatization can trade in Hong Kong in “H” shares and in NYSE exchanges.

“A” shares are issued to and traded by Chinese nationals. They are issued and traded in

Renminbi. “B” shares are denominated in Renminbi but are traded in foreign currency. From

March 2001, in addition to foreign investors, Chinese nationals with foreign currency can also

trade “B” shares.

[edit]Investment Companies by Foreign Investors (ICFI)

Brief coverage is provided.

Investment Companies are those established in China by sole foreign-funded business or jointly

with Chinese partners who engage in direct investment. It has to be incorporated as a company

with limited liability.

The total amount of the investor's assets during the year preceding the application to do

business in China has to be no less than US $ 400 million within the territory of China. The paid-

in capital contribution has to exceed $ 10 million. Furthermore, more than 3 project proposals of

the investor's intended investment projects must have been approved. The shares subscribed

and held by foreign Investment Companies by Foreign Investors (ICFI) should be 25%. The

investment firm can be established as an EJV.

[edit]Joint-Ventures in India

[edit]Introduction

India’s has an open philosophy on capital markets and it closely parallels its English peers in

operation. The Bombay Stock Exchange (BSE) has close to 5000 listed shares, and trades in

several thousand more, making it the largest stock exchange in the world [22]. The National Stock

Exchange is the other exchange at present. English is one of the preferred languages of the

market and its policies are first announced in English.

The Indian people are skilled and entrepreneurial by nature as evident in world markets but in

India less than 1% of its billion population at present – that is, only 11 million people -

representing 3% of households invest in the market.[23]

People who ‘work’ the market in other languages are adept in recognizing concepts in

derivatives and futures and trade in them. India is one of three countries that has

supercomputers, one of six that has satellite launching facilities and has over 100 Fortune 500

companies doing R&D in the country.[24]

India does not restrict the repatriation of investments, dividends, profits and if need be, the

principal ,through the single autonomous entity, the Reserve Bank of India (RBI). The Indian

currency – the Rupee – is 100% convertible for ‘’ earnings’’ at free market rates.

India’s new policies (described below) have resulted in aggregate foreign investment flowing

into India increasing from US$103 million in 1990-91 to US$61.8 billion in 2007-2008.[25],[26]

[edit]Liberalization of policy

India’s basic outlines of industrial development were framed by Pandit Jawaharlal Nehru in 1956

making the private sector a participant in development, but giving the public sector a dominant

position.[27]

However, by the early 90s the situation in the world economies turned: Japan entered a phase

of stagnancy of growth, the pace of the ‘Asian tigers slowed, as did the European economy. But,

also, the country’s balance of payments crisis.

To counteract these effects a new policy was born in July 1991, the reformed New Industrial

Policy (NIP) [28] . It and later modifications (further liberalization) streamlines procedures,

deregulated industrial licensing, and vastly expanded the role for the private sector, while

shrinking the Public Sector. Also, anti-trust laws ( the Monopoly and Restrictive Practices Act)

were trimmed and customs duties for industrial goods slashed. The restrictive Foreign

Exchange Regulation Act (FERA) was replaced by the Foreign Exchange Management Act

(FEMA).

Industrial policy divided industry into three categories:

those that would be reserved for public sector development,

those under private enterprise with or without State participation, and

those in which investment initiatives would ordinarily emanate from private entrepreneurs.

Only six industries are exclusively ‘reserved’ for the Public Sector.

Trading (except single-brand retailing), agricultural or plantation activities housing and real

estate business (except development of townships), agriculture, atomic energy, gambling &

betting, lottery business, and retail construction of residential/commercial premises, roads or

bridges are on the ‘’’negative’’’ list for foreign participation..

[edit]Automatic licensing and administered licensing

India’s investment policy as of April 2010 is presented at the site [29]. Briefly, India allows

investments both through Foreign Direct Investment (FDI), meant for long-term controlling

investments and Portfolio Investment - taking a position by buying shares of a company - which

is likely short-term capital market operation. Foreign Institutional Investors ("FII’s) from reputable

institutions (like pension funds, mutual funds) may (and do) participate in the Indian capital

markets.

Industrial approvals are ‘’ automatic ‘’ ( RBI approval of investment) for most manufacturing

industries with equity investment up to 51% foreign control and as of 1997 to 74% in certain

select industries ( See the current policy highlighted above). For another 36 ‘’ sectors’’ there are

varying limits ‘’without output restrictions’’. RBI approvals come within two weeks for the

invested entity. Investments can flow to the country prior to approvals for such cases. Even in

sectors limited to 51%, a higher level of control, up to 74%, is feasible if approach is made to the

Foreign Investment Promotiomn Board (FIPB) – thus, ’administered’’-licensing . Investments up

to 100% are allowed in power generation, coal washeries, electronics, an Export Oriented Unit

(EOU) in the EPZ's).

NRI (Non-Resident Indians), PIO (People of Indian Origin), and OCBs (Overseas Commercial

Bodies) have relaxed accommodation

Industrial licensing of the 1951 policy is applicable to “Annex II” (not shown here) industries

which revolve around certain key natural resources. It is administered through FIPB .

[edit]Joint venture companies

JV companies are the preferred form of corporate investment but there are no separate laws for

joint ventures. Companies which are incorporated in India are treated on par as domestic

companies .

The above two parties subscribe to the shares of the JV company in agreed proportion, in

cash, and start a new business.

Two parties, (individuals or companies), incorporate a company in India. Business of one

party is transferred to the company and as consideration for such transfer, shares are

issued by the company and subscribed by that party. The other party subscribes for the

shares in cash.

Promoter shareholder of an existing Indian company and a third party, who/which may be

individual/company, one of them non-resident or both residents, collaborate to jointly carry

on the business of that company and its shares are taken by the said third party through

payment in cash.

Private companies ( only about $2500 is the lower limit of capital, no upper limit) are

allowed [30] in India together with and public companies, limited or not, likewise with partnerships.

sole proprietorship too are allowed. However, the latter are reserved for NRIs.

Through capital market operations ‘’foreign’’ companies can transact on the two exchanges

without prior permission of RBI but they cannot own more than 10 percent equity in paid-up

capital of Indian enterprises, while aggregate foreign institutional investment (FII) in an

enterprise is capped at 24 percent.

The establishment of wholly-owned subsidiaries (WOS) and project offices and branch offices,

incorporated in India or not. Sometimes, it is understood, that Branches are started to ‘test’ the

market and get a its flavor. Equity transfer from residents to non-residents in mergers and

acquisitions (M&A) is usually permitted under the automatic route. However, if the M&As are in

sectors and activities requiring prior government permission (Appendix 1 of the Policy) then

transfer can proceed only after permission [31] .

Joint ventures with trading companies are allowed together with imports of secondhand plants

and machinery.

It is expected that in a JV, the foreign partner supplies technical collaboration and the pricing

includes the foreign exchange component, while the Indian partner makes available the factory

or building site and locally made machinery and product parts. Many JVs are formed as public

limited companies (LLCs) because of the advantages of limited liability.[32].

JVs are expected in the nuclear industry following the NSG waivers for nuclear trade. The

nuclear power industry has been witnessing several JVs. The country has set an imposing

target of achieving an installed capacity of 20 GW by 2020 and 63 GW by 2030. The total size

of the Indian nuclear power market will be around $40 billion by 2020 with a growth rate (AAGR)

of 9.2% in installed nuclear capacity during 2008–20. The total investments made are to a tune

of around $1.30 billion following the Indo-US nuclear deal in 2008 [33] .

There is a group of industries reserved for the small scale sector wherein foreign investment

cannot exceed 24% and if does then approval is necessary from the FIPB, and the unit loses its

‘smallness’ and requires an industrial license [34] .

There are many JVs. lying outside of this discussion – Hindusthan Unilever-Unilever, Suziki-

Govt. of India (Maruti Motors), Bharti Airteli-Singapore Telecom, ITC-Imperial Tobacco, P&G

Home Products, Whirlpool, having financial participation with the financial institutions and the

lay public which are monitored by SEBI (Securities and Exchange Board of India), also an

autonomous body. This lies outside this discussion.

Under the country’s laws, a public company must:

Have at least seven shareholders

Have at least three directors

Obtain government approval for the appointment of its management.

Have both a "trading certificate" and certificate of incorporation before commencing its

business.

Publish also a prospectus (or file a statement) before it can start transact business.

Hold statutory meetings

There are several other provisions contained in the Companies Act 1956 which also need to be

followed.

[edit]Royalty payments and capitalization

For the automatic route, RBI allows [35]:

Lump sum payments ‘’not’’ exceeding US$ 2 million.

Royalty payable is limited to 5 % for domestic sales and 8 % for exports,’’ ‘’without’’ any

restriction on the duration of the royalty payments’’. The royalty limits are net of taxes and are

calculated according to standard conditions. Payments are made through RBI.

The royalty is calculated on the basis of the net ex-factory sale price of the product, exclusive of

excise duties, minus the cost of the standard bought-out components and the landed cost of

imported components, irrespective of the source of procurement, including ocean freight,

insurance, custom duties, etc.

Issue of equity shares against lump sum fees and royalty fees is permitted..

For exceeding this norm, the firm has to approach FPBI.

[edit]Legal system in the country

India is a common law country with a written constitution, guaranteeing individual and property

rights.

There is a single hierarchy of courts.

Arbitration can be in India or International Commercial Arbitration.

The country has recently enacted the Arbitration and Conciliation Act, 1996 ("New Law"). The

New Law is based on the United Nations Commission on International Trade Law (UNCITRAL)

Model Law on International Commercial Arbitration ("Model Law [36].

All agreements are under Indian laws.

[edit]Articles of Association

Introduction

The Articles of Association determine how a company is run. It is a set of 'bye-laws' which form

the 'constitution' of the Company. It is often required by Law to be part of the Joint- Venture

agreement . Some clauses relating to the following may be absent. Where this the case, it is

assumed that the provisions as laid out in the in Company Law apply. The Articles can cover a

medley of topics, mot all of which is required in a country's law. Although all will not be

discussed, it can cover:

Valuation of intellectual rights, say,the valuations of the IPR of one partner and,say,the real

estate of the other

The appointments of directors - which shows whether a shareholder dominates or shares

equality.

directors meetings - the quorum and percentage of vote

management decisions - whether the board manages or a founder

transferability of shares - assignment rights of the founders or other members of the

company

special voting rights of a Chairman,and mode of election

dividend policy - percentage of profits to be declared when there is profit

winding up - the conditions,notice to members

confidentiality of know-how and founders' agreement and penalties for disclosure

first right of refusal - purchase rights and counter-bid by a founder.

Some agreements mention that the Articles of Association as given in Company Law apply to

the agreement except where specifically differing; and others say, explicitly, that they do not

bind that the agreement and that it contains all legally-acceptable bye-laws. The typical Articles

in an Indian Public Sector Company are given in [37].

A Company is essentially run by the shareholders, but for convenience, and day-to-day working,

by the Directors. The shareholders elect the directors at the Annual General Meeting (AGM),

which is statutory. Thus, the Board of Directors (BOD).

The number of directors depends on the size of the Company and statutory requirements. The

Chairperson is generally a well-known outsider but he /she may be a working Executive, typical

of an American enterprise. The Directors may or may not be employees of the Company.

There are usually some major shareholders who form the company. Each usually has the right

to nominate, without objection of the other, certain number of directors who become nominees

for the election by the shareholder body at the AGM. The Treasurer and Chairperson is usually

the privilege of one of the JV partners (which nomination can be shared). Shareholders can also

elect Independent directors - persons not associated with the promoters of the company. person

is generally a well-known outsider but he /she may be a working Executive. The Directors may

or may not be employees

Once elected, the BOD manages the Company. The shareholders play no part till the next

AGM. or EGM. The Objectives and the purpose of the Company are determined in advance by

the shareholders and the Memorandum of Association (MOA) - which denotes the name of the

Company, its Head- Office, its Directors and the main purposes of the Company - for public

access. It cannot be changed except at an AGM or Extraordinary General Meeting (EGM) and

statutory allowance. The MOA is generally filed with a 'Registrar of Companies' who is an

appointee of the Government. For their assurance the shareholders, an Auditor is elected at

each AGM. The MOA is currently dispensed with in many countries.

The Board meets several times each year. At each meeting there is an 'agenda' before it. A

minimum number of Directors (a quorum) is required to meet. This is either determined by the

'bye-laws' or is statutory. It is Presided by the Chairperson or in his absence, by the Vice-Chair.

The Directors survey their area of responsibility. They may determine to make a 'Resolution' at

the next AGM or if it is an urgent matter, at an EGM. The Directors who are the electives of one

major shareholder, may present his/her view but this is not necessarily so - they may have to

view the Objectives of the Company and competitive position. The Chair may have to 'break' the

vote if there is a 'tie'. At the AGM, the various Resolutions are put to vote.

The AGM is called with a notice sent to all shareholders. A certain quorum of shareholders are

required to meet. If the quorum requirement is not met , it is canceled and another Meeting

called. If it at that too a quorum is not met, a Third Meeting is called and the members present,

unlimited by the quorum, take all decisions.

Decisions are taken by a show of hands; The Chair is always present. Where decisions are

made by a show of hands is challenged, it is done, by a count of votes. Voting can be taken in

person or by marking the paper sent by the Company. A person who is not a shareholder of the

Company can vote if he/she has the 'proxy', an authorization from the shareholder. Each share

carries the votes assigned to it. Some votes maybe for the decision, others not. Two types of

decision known as the Ordinary Resolution and the other a Special Resolution can be tabled at

a Director's Meeting: The Ordinary Resolution requires the endorsement by a majority vote,

sometimes easily met by partners' vote. The Special Resolution requires 60,70 or 80% of the

vote as stipulated by the 'constitution' or the very same bye-laws of the Company. Shareholders

other than partners are required to vote. The matters which require the Ordinary and Special

Resolution to be passed are enumerated. A typical Articles of Association is shown in the Nestle

S.A. or Nestle Ltd [38].

[edit]Dissolution

The JV is not a permanent structure. It can be dissolved when:

Aims of original venture met

Aims of original venture not met

Either or both parties develop new goals

Either or both parties no longer agree with joint venture aims

Time agreed for joint venture has expired

Legal or financial issues

Evolving market conditions mean that joint venture is no longer appropriate or relevant

Strategic allianceFrom Wikipedia, the free encyclopedia

A Strategic Alliance is a formal relationship between two or more parties to pursue a set of agreed upon

goals or to meet a critical business need while remaining independent organizations.

Partners may provide the strategic alliance with resources such as products, distribution channels,

manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual

property. The alliance is a cooperation or collaboration which aims for a synergywhere each partner

hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance

often involvestechnology transfer (access to knowledge and expertise), economic specialization [1], shared

expenses and shared risk.

Contents

 [hide]

1 Types of strategic alliances

2 Stages of Alliance Formation

3 External links

4 Footnotes

[edit]Types of strategic alliances

Various terms have been used to describe forms of strategic partnering. These include ‘international

coalitions’ (Porter and Fuller, 1986), ‘strategic networks’ (Jarillo, 1988) and, most commonly, ‘strategic

alliances’. Definitions are equally varied. An alliance may be seen as the ‘joining of forces and resources,

for a specified or indefinite period, to achieve a common objective’.

There are seven general areas in which profit can be made from building alliances.[2]

According to Yoshino and Rangan[3] the Internationalisation Strategies

[edit]Stages of Alliance Formation

A typical strategic alliance formation process involves these steps:

Strategy Development: Strategy development involves studying the alliance’s feasibility, objectives

and rationale, focusing on the major issues and challenges and development of resource strategies

for production, technology, and people. It requires aligning alliance objectives with the overall

corporate strategy.

Partner Assessment: Partner assessment involves analyzing a potential partner’s strengths and

weaknesses, creating strategies for accommodating all partners’ management styles, preparing

appropriate partner selection criteria, understanding a partner’s motives for joining the alliance and

addressing resource capability gaps that may exist for a partner.

Contract Negotiation: Contract negotiations involves determining whether all parties have realistic

objectives, forming high calibre negotiating teams, defining each partner’s contributions and rewards

as well as protect any proprietary information, addressing termination clauses, penalties for poor

performance, and highlighting the degree to which arbitration procedures are clearly stated and

understood.

Alliance Operation: Alliance operations involves addressing senior management’s commitment,

finding the calibre of resources devoted to the alliance, linking of budgets and resources with strategic

priorities, measuring and rewarding alliance performance, and assessing the performance and results

of the alliance.

Alliance Termination: Alliance termination involves winding down the alliance, for instance when its

objectives have been met or cannot be met, or when a partner adjusts priorities or re-allocates

resources elsewhere.

The advantages of strategic alliance includes:

1. Allowing each partner to concentrate on activities that best match their capabilities.

2. Learning from partners & developing competences that may be more widely exploited elsewhere

3. Adequency a suitability of the resources & competencies of an organization for it to survive.

There are four types of strategic alliances: joint venture, equity strategic alliance, non-equity strategic

alliance, and global strategic alliances.

Joint venture is a strategic alliance in which two or more firms create a legally independent company

to share some of their resources and capabilities to develop a competitive advantage.

Equity strategic alliance is an alliance in which two or more firms own different percentages of the

company they have formed by combining some of their resources and capabilities to create a

competitive advantage.

Nonequity strategic alliance is an alliance in which two or more firms develop a contractual-

relationship to share some of their unique resources and capabilities to create a competitive

advantage.

Global Strategic Alliances working partnerships between companies (often more than 2) across

national boundaries and increasingly across industries. Sometimes formed between company and a

foreign government, or among companies and governments

Difference between joint venture and strategic alliance?

In: Business & Finance [Edit categories]

Business Managementwww.HTCampus.com/BusinessManagement

Join Integrated BBA & MBA courses, Register at HTcampus.Make a Career.

Ads

[Improve]

A unoin of two or more parties who contractually agree to contribute to a specific task for

specified time period. Under JV two firms join and form a seperate legal entity and operate ar per

partnership Act. The JV can be between individuals or corporations.

While Stategic Alliance is mutual Coordination of strategic planning and management in order to

achieve long term objectives between two organisations. under this , each organisation will work

independently and no seperate entity is formed. SA is considered as less risky due to less

legalities.

Read more:

http://wiki.answers.com/Q/Difference_between_joint_venture_and_strategic_alliance#ixzz17ztXZ

mFe

Louis is an incredibly focused executive, he makes it very clear to everyone what his expectations are."

- John W. Thompson, former general manager of IBM's North American Sales Group.1

"He's thinking like a businessman and IBM hasn't had someone at the top thinking like a businessman for many years. IBM's chairmen have for years treated the company like an institution that couldn't be changed. But Gerstner is going through a methodical, unsentimental resuscitation of IBM."

- Edwin Black, publisher of OS/2 Professionals, an IT magazine in the US.2

Introduction

In 1993, IBM, a global leader in the IT industry

was in deep financial trouble. The company had reported a record net loss of $8.1 billion. Many analysts wrote off IBM as dead. However, eight years down the line in 2001, the company reported a net income of $7.7 billion (Refer Exhibit I). During the period 1993-2001, the share price of IBM shot up by nearly 800%. This was the period in which Louis V. Gerstner Jr. (Gerstner) headed IBM. 

Under the leadership of Gerstner, IBM made a remarkable comeback and proved its critics wrong. In doing so, IBM seemed to have made significant changes which had an impact on the entire information technology (IT) industry.  

It strategically positioned its server family to suit the needs of the emerging Enterprise Resource Planning (ERP) and e-commerce applications. IBM also changed its emphasis from being product centric to being customer-centric in order to provide complete solutions to its clients. Gerstner played a major role in reviving the fortunes of IBM. Under Gerstner, the image of IBM was transformed from a company which primarily manufactured mainframes to a company which offered complete solutions in hardware, software, and other technologies.

 Gerstner brought about a radical change in the work culture of IBM. The turnaround was achieved by a series of well calculated and unconventional moves, which appeared unreasonable to many employees of IBM as well as industry analysts. 

According to analysts, Gerstner's style of functioning was quite different from that of his predecessors. He was a man of conviction and always followed his own instincts. He was seldom disturbed by what his critics said. He believed that his deeds spoke for himself. He wanted results and expected his employees to give the results at any cost. He did not mince words when it came to expressing his views on their performance...

Introduction Contd...

Gerstner never believed in setting long-term plans. Instead, he focused on immediate problems, and evolved strategies to solve them. 

He identified the needs of customers, and developed solutions to satisfy their needs. Gerstner watched the IT industry closely and carefully and was quick to foresee the trends which were likely to emerge in the future. 

He was among the few people who visualized that networking could transform the way people worked. While visualizing these changes was not exceptional, converting these visions into the potential opportunities was indeed exceptional...

Background Note

Gerstner was born on March 01, 1942 in Minolta, New York, US. His father was a traffic manager at F&M Schaefer Corporation Brewery. Right from his childhood, his parents stressed the importance of education and discipline. Thus, they helped to a great extent in shaping up his attitude towards life. Gerstner graduated in engineering at Dartmouth3 in 1963. Two years later, he earned a business management degree from Harvard Business School.

Fresh out of college, Gerstner joined the reputed management consultancy firm, McKinsey & Company in 1965, earning the distinction of being the youngest manager to be hired by the firm at that time. 

He soon became noted as a hard task master. Within four years of joining, he was promoted as a partner. He was among the selected few, who were offered partnership, before six years, which was the general practice. In 1973, he was promoted as senior partner in the firm and was responsible for handling major clients. Two years later i.e. in 1975, he was appointed as a director of the firm. He was the youngest director of the firm.

During his thirteen years tenure at McKinsey, Gerstner had many accomplishments to his credit, prominent among them being devising the financial strategy practice for McKinsey, helping the transportation firm, Penn Central Railway4 to turnaround from the verge of bankruptcy and helping American Express5 to expand its business. He was also a member of the leadership committee at the firm. An important leadership lesson which Gerstner learned at McKinsey was to thoroughly focus on the problem on hand and create an environment which encouraged people to come out with their ideas, irrespective of their designation in the firm...

Excerpts

The Tenure at IBM  

When Gerstner joined IBM, he was sarcastically referred to as 'the guy from a cookie company. During that time, IBM was passing through the worst phase ever in its nearly eight decade long history. 

IBM recorded an operating loss of $325 mn in the first half of 1993, and the stock price dipped by about 15 percent within few months of Gerstner becoming CEO. 

The financial situation of the company was deteriorating. The company posted a net loss of $2.86 billion in 1991, followed by a net loss of $4.97 billion in the financial year 1992...The Early Initiatives

After joining IBM, Gerstner's immediate task was to make the company profitable. He spent the initial period at the firm learning about the prevalent situation. Gerstner visited different IBM facilities all over the world and met customers, competitors, senior executives, financial analysts, and consultants to get a first hand account of the actual state of affairs. During these interactions, he learned that customers still appreciated IBM since it offered solutions for a host of their computer related needs under one roof...

The Turnaround Strategy

In 1994, Gerstner made efforts to improve the reporting procedures across different units of the firm. This helped him to closely monitor the production schedules, cost schedules and sale of different products. 

He also started focusing on specific problems related to individual units. He realized that the personal computers division, which had good potential, was performing very poorly. 

The division was facing tough competition from companies such as Dell, HP and Compaq...

Emphasis on e-Business

In 1997, Gerstner's network centered computing strategy evolved into a full-fledged 'e-business' strategy for IBM. This strategy sought to leverage on IBM's strengths in big servers, huge storage capability, bullet-proof databases, massive processing power and expert systems integration. IBM provided the complete package for e-business i.e. hardware, software,

training, security, networking and services. Lotus Notes Groupware added another powerful feature to IBM's e-business solutions...

The Criticism

Though Gerstner has been credited for his remarkable efforts to turn around IBM, the manner in which he went about this task drew lot of criticism. His early moves to keep IBM intact and change the corporate culture of IBM were severely criticized by the employees...

Exhibits

Exhibit I: Financial Performance of IBM for the Period 1992-2002