The allocation of control rights in pharmaceutical alliances

This paper uses alliances in the biopharmaceutical industry to test contractual theories of the firm. I find that the allocation of control rights between pharmaceutical and biotechnology firms is sensitive to the bargaining position of both parties. Pharmaceutical firms engaging in more costly, later stage alliances tend, on average, to relinquish more rights. Additionally, biotechnology firms entering their first alliance tend, on average, to relinquish more rights. Finally, I explore if and when alliances begin to impact pharmaceutical firm shareholder value. Overall, my findings indicate the importance of considering both parties to a contract when studying contractual design.     

Strategic alliances,equity stakes,and entry deterrence

I study how strategic alliances and their impact on future competitive incentives can motivate interfirm equity sales. In the model, an alliance between an entrepreneurial firm and an established firm improves efficiency for both. However, the requisite knowledge transfer heightens the established firm's incentive to enter one of its partner's markets. I show that equity can eliminate the entry incentive, but accommodation is sometimes chosen to encourage entrepreneurial effort on future growth options. I analyze stake sizes, block pricing, and welfare effects. The results have implications for equity alliances, corporate venture capital, and the organization of research activities.     

Costs, valuation, and long-term operating effects of global strategic alliances

Using global product design and development as an example of global strategic alliance, I find that successful global strategic competition is still largely a variable cost reduction game as opposed to the recently touted fixed cost amortization game. Further, the firm's cost efficiency is enhanced when its global production initiative is characterized by a high degree of strategic alliances. Importantly, I find that global strategic alliances have both valuation effects and long-term operating effects, and that both effects are positive functions of the degree of strategic alliances. After controlling for pertinent explanatory factors such as competitive strategy posture, industry concentration, geographic spread of operation, product-type, and information technology infrastructure of firms, I find that variable cost and production efficiencies remain significant determinants of the valuation effects of global business alliances. Overall, results in this study suggest partnering firms should consider the relative efficiencies of inputs and production technology as effective ways of leveraging the benefits of global strategic alliances.     

Private communication among competitors and public disclosure

I study how private communication among competitors affects their public disclosures. Theory suggests that competing firms can use public disclosure to coordinate, and predicts less public disclosure when there is more private communication. Using data on strategic alliances, I predict and find that firms that enter strategic alliances with competitors reduce their public disclosure, and that the reduction is more pronounced for alliances that allow for more private communication.     

On IT governance structures and their effectiveness in collaborative organizational structures

Organizations today engage in various forms of alliances to manage their existing business processes or to diversify into new processes to sustain their competitive positions. Many of today's alliances use the IT resources as their backbone. The results of these alliances are collaborative organizational structures with little or no ownership stakes between the parties. The emergence of Web 2.0 tools is having a profound effect on the nature and form of these alliance structures. These alliances heavily depend on and make radical use of the IT resources in a collaborative environment. This situation requires a deeper understanding of the governance of these IT resources to ensure the sustainability of the collaborative organizational structures. This study first suggests the types of IT governance structures required for collaborative organizational structures. Semi-structured interviews with senior executives who operate in such alliances reveal that co-created IT governance structures are necessary. Such structures include co-created IT steering committees, co-created operational committees, and inter-organizational performance management and communication systems. The findings paved the way for the development of a model for understanding approaches to governing IT and evaluating the effectiveness for such governance mechanisms in today's IT‐dependent alliances. This study presents a sustainable IT-related capabilities approach to assessing the effectiveness of suggested IT governance structures for collaborative alliances. The findings indicate a favorable association between organizations' IT governance efforts and their ability to sustain their capabilities to leverage their IT resources. These IT-related capabilities also relate to measures business value at the process and firm level. This makes it possible to infer that collaborative organizations' IT governance efforts contribute to business value.     

Measuring the value of strategic alliances in the wake of a financial implosion: Evidence from Japan’s financial services sector

This paper examines the wealth effects of financial-institution strategic alliances on the shareholders of the newly allied firms. Our paper is different from most previous studies, in that we focus on financial institutions, we employ Japanese data for the late 1990s, and we study whether different types of alliances result in differing magnitudes of stock market responses.We find that a strategic alliance, on average, increases the value of the partner firms. Second, the gains from the alliance are spread more widely among the partners than would be suggested by a random alternative. Third, smaller partners tend to experience larger percentage gains. Fourth, the market values inter-group alliance announcements more than intra-group alliance announcements. Fifth, we do not find a significant difference in the abnormal returns shown by domestic–foreign alliances and domestic–domestic alliances.     

Blurring Firm Boundaries: The Role of Venture Capital in Strategic Alliances

This study documents a new value-added role of venture capitalists and addresses important questions about how resources are combined to create firms. As part of the nexus of contracts surrounding a firm, strategic alliances can be viewed as relational contracts that blur firm boundaries. This paper provides evidence that alliances are more frequent among companies sharing a common venture capitalist. The effect is concentrated in alliances in which contracting problems are more pronounced, consistent with venture capitalists utilizing informational and other advantages in providing resources to firms. Further, these alliances improve the probability of exit for venture-backed firms.     

The Wealth Effect of Japanese-US Strategic Alliances

We investigate the wealth impact for Japanese and US firms that announce nonequity strategic alliances. We find that on average, both Japanese and US shareholders benefit from the formation of international alliances. We also find that shareholders earn larger abnormal returns in these alliances when the partnering firms are relatively small in size, have higher growth opportunities, or are less profitable. We show that both Japanese and US partnering firms display significant improvements in operating performance over the three-year period subsequent to the formation of international alliances.     

Connected VCs and strategic alliances: Evidence from biotech companies

We study a new channel through which portfolio companies benefit from ties among venture capitalists (VCs). By tracing individual VCs' investment and syndication histories, we show that VCs' ties improve companies' access to strategic alliance partners. While existing studies demonstrate that alliances are more frequent among companies sharing the same VC, we provide evidence that alliances are also more frequent among companies indirectly connected through VC syndication networks. In addition, our results suggest that VCs' ties mitigate asymmetric information problems that arise when alliances are formed. Finally, strategic alliances between companies from connected VCs' portfolios tend to perform well. We demonstrate that this type of alliance is associated with higher IPO chances. We also address alternative explanations and related endogeneity concerns.     

Your alliances are too stable

A 2004 McKinsey survey of more than 30 companies reveals that at least 70% of them have major alliances that are underperforming and in need of restructuring. Moreover, JVs that broaden or otherwise adjust their scope have a 79% success rate, versus 33% for ventures that remain essentially unchanged. Yet most firms don't routinely evaluate the need to overhaul their alliances or intervene to correct performance problems. That means corporations are missing huge opportunities: By revamping just one large alliance, a company can generate 100 million dololars to 300 million dollars in extra income a year. Here's how to unlock more value from alliances: (1) Launch the process. Don't wait until your venture is in the middle of a crisis; regularly scan your major alliances to determine which need restructuring. Once you've targeted one, designate a restructuring team and find a senior sponsor to push the process along. Then delineate the scope of the team's work. (2) Diagnose performance. Evaluate the venture on the following performance dimensions: ownership and financials, strategy, operations, governance, and organization and talent. Identify the root causes of the venture's problems, not just the symptoms, and estimate how much each problem is costing the company. (3) Generate restructuring options. Based on the diagnosis, decide whether to fix, grow, or exit the alliance. Assuming the answer is fix or grow, determine whether fundamental or incremental changes are needed, using the five performance dimensions above as a framework. Then assemble three or four packages of restructuring options, test them with shareholders, and gain parents' approval. (4) Execute the changes. Embark on a widespread and consistent communication effort, building support among executives in the JV and the parent companies. So the process stays on track, assign accountability to certain groups or individuals.     

WHEN DO STRATEGIC ALLIANCES CREATE SHAREHOLDER VALUE?

This article reports the findings of the authors' study of the stock market reaction to 345 strategic alliances announced during the period 1983-1992. The study reports statistically significant gains that, when translated into dollars, are divided roughly evenly between the larger and smaller partners (though the smaller partners experience larger percentage gains). Moreover, the value gains are largest in those cases in which two high-tech firms ally to develop or apply new technology, while the market shows less enthusiasm for non-technical or marketing alliances.
The underlying rationale for strategic alliances is that each partner contributes its expertise to the relationship and gains access to some special resource or competence that it lacks—but without incurring the costs associated with creating a larger organization through a merger or joint venture. Consistent with this argument, the authors report that alliances are relatively long-lasting, and are not preludes to merger or formal creation of joint venture entities.     

Do strategic alliances in a developing country create firm value? Evidence from Korean firms

This paper examines the impact of strategic alliances on the increment of firm value in the case of Korean firms. For this, we apply an event study using OLS and GARCH market models. The results of our study show that, strategic alliances in Korea produce significant positive abnormal returns before and at the announcement date, indicating an increase in firm value. This firm value augmented by alliance announcements does not have any relationship with firms' growth but has an inverse relationship with firms' sizes. Interestingly, non-technological marketing alliances contribute to increasing firm value more than technological alliances do, regardless of partner firms' nationality. This evidence is contrasted to the cases of firms in advanced countries. Particularly, Korean firms' marketing alliances with firms in advanced G7 countries contribute to largely increasing the firm value of the former.     

Growth Strategies and Value Creation: What Works Best for Stock Exchanges?

In recent years, demutualized stock exchanges increasingly have been engaging in mergers and acquisition (M&A) and alliance activities. To examine the effect of these growth strategies on exchange shareholders’ value creation, we focus on 15 public stock exchanges and investigate their short‐run share price responses to the formation of 111 M&As and alliances around the world spanning the period 2000–2008. Our findings show that the average stock price responses for M&As and alliances are positive. M&As create more value than alliances. For alliances, joint ventures generate more value than nonequity alliances. More value accrues when the integration is horizontal than when it is vertical. Cross‐border integration creates more value than domestic integration. In addition, there is evidence of learning‐by‐doing effects in stock exchange integration activities. Finally, we find that when the partnering exchange is located in a country with better shareholder protection, accounting standards, and capital market development, more shareholder value accrues to our sample exchange. These patterns are consistent when we examine the exchanges’ long‐run performance.     

Do joint ventures and strategic alliances create value for bondholders?

This paper investigates whether joint ventures and strategic alliances create value for bondholders by examining the bond market’s reaction to announcements of these two types of cooperative business activities. Based on 2964 announcements from 1985 to 2011, we find that joint ventures and strategic alliances create significant value for bondholders. The average two-month abnormal bond return is 0.64% for joint ventures and 0.70% for strategic alliances. We find no evidence of a wealth transfer between the bondholders and stockholders. We further explore the determinants of bond value creation through hypotheses on the synergy effect, the alleviation of financial constraints, and real options. The results of our study show that financial synergy is a main driver of bondholder wealth effects in joint ventures, while operating synergy is a dominant factor in strategic alliances. We also find evidence to support the real option hypothesis for both events. Finally, we show that the structure of bond contracts plays an important role in the link between synergy and abnormal bond returns.     

The source of abnormal returns from strategic alliance announcements

This study links together theoretical models of strategic alliances with an empirical examination of stock returns on the announcement of strategic alliances. Using a sample of 123 strategic alliance announcements, the results find strong support for the hypothesis that strategic alliance announcements generate significant positive abnormal returns on the announcement day. Although strategic alliances are more prevalent in the higher technology industries, the source of the abnormal stock returns is a subsample of firms with the lowest market to book values. This is found to be supportive of the hypothesis that the announcement of a strategic alliance is additional information for firms with low growth. There is no empirical support for the knowledge, flexibility and the hubris hypotheses.     

Private equity alliances in mergers

This paper examines reasons for alliance formation between private equity bidders when compared to sole-sponsored private equity deals. Testing a comprehensive set of hypotheses, we find strong evidence for the relative-risk hypothesis of Robinson (2008), as private bidders are more likely to form an alliance in a diversifying acquisition. We also find that private equity alliances involved more profitable target firms when compared to sole-sponsored private equity deals. Finally, we find that the significantly lower abnormal returns for target firms in private equity alliance deals are eliminated once we control for differences in the types of target firms acquired by private equity alliances and single private equity bidders. The last result suggests that private equity alliances do not generate significantly lower target returns because of collusion.     

Innovation beyond firm boundaries: Strategic alliances and corporate innovation

In this paper, we empirically analyze how strategic alliances affect the innovation output of the firms forming the alliance. We find a positive effect of R&D-related strategic alliances on corporate innovation, as measured by the quantity and quality of patents filed. This effect is stronger for firms led by CEOs with higher general managerial skills, firms with greater experience from earlier alliances, and firms operating in R&D-intensive industries. Furthermore, the innovation-fostering effect of strategic alliances is more pronounced if alliance partnering firms share a common institutional blockholder or have a higher degree of technological proximity. We also document, for the first time in the literature, a unique contractual mechanism through which firms share the benefits of innovation with their alliance partners, namely, “co-patenting.”     

The Impact of Past Syndicate Alliances on the Consolidation of Financial Institutions

The impact of past syndicate alliances on the consolidation of financial institutions is examined. The odds of two lenders combining increases with the intensity and exclusivity of their prior syndicated loan alliances. The impact is higher for international mergers and acquisitions (M&As) and for prior syndicate co-relationships where the acquirer and target were participant and lead, respectively. The odds of a particular lender being a target decreases as its return on equity (ROE) and earnings/price (E/P) ratios increase and as its size and growth opportunities decrease. The intensity and exclusivity of the syndicated loan alliances leading up to M&A announcements are significantly higher for non-US versus US M&As. The significantly lower short- and long-term performances for both acquirers and targets with prior syndicate co-involvements disappear in the presence of control variables that account for the less frequent use of cash payments, the greater incidence of divestitures, and the higher percentage of shares acquired through their M&As. Acquirers with versus those without past syndicate target co-involvements exhibit greater outperformance for control-firm benchmarked ROEs and lower underperformance for control-firm and prior-to-M&A benchmarked ROEs.     

When to ally & when to acquire

Acquisitions and alliances are two pillars of growth strategy. But most businesses don't treat the two as alternative mechanisms for attaining goals. Consequently, companies take over firms they should have collaborated with, and vice versa, and make a mess of both acquisitions and alliances. It's easy to see why companies don't weigh the relative merits and demerits of acquisitions and alliances before choosing horses for courses. The two strategies differ in many ways: Acquisition deals are competitive, based on market prices, and risky; alliances are cooperative, negotiated, and not so risky. Companies habitually deploy acquisitions to increase scale or cut costs and use partnerships to enter new markets, customer segments, and regions. Moreover, a company's initial experiences often turn into blinders. If the firm pulls off an alliance or two, it tends to enter into alliances even when circumstances demand acquisitions. Organizational barriers also stand in the way. In many companies, an M&A group, which reports to the finance head, handles acquisitions, while a separate business development unit looks after alliances. The two teams work out of different locations, jealously guard turf, and, in effect, prevent companies from comparing the advantages and disadvantages of the strategies. But companies could improve their results, the authors argue, if they compared the two strategies to determine which is best suited to the situation at hand. Firms such as Cisco that use acquisitions and alliances appropriately grow faster than rivals do. The authors provide a framework to help organizations systematically decide between acquisition and alliance by analyzing three sets of factors: the resources and synergies they desire, the marketplace they compete in, and their competencies at collaborating.