Corporate External Growth and Alliance Strategies
External Development Strategies
Benefits:
- Time savings (e.g., compared to internal growth)
- Overcoming entry barriers
- Risk reduction
- Greater financing alternatives
Disadvantages:
- High purchase price
- Difficulty integrating two organizations
- Antitrust regulations (e.g., U.S. antitrust laws, EU competition laws)
- Acquisition of some unnecessary assets
Company Integration Methods
Pure Merger
Two or more companies agree to combine, creating a new enterprise by contributing all their assets and dissolving the original enterprises.
Merger by Absorption
One company integrates another by absorbing all its assets; the absorbed company ceases to exist.
Partial Asset Contribution
A company transfers only a portion of its assets to an existing or newly created company, without the original company disappearing.
Concentration can be:
- Horizontal: Involves companies at the same stage of the transformation process, producing the same product or providing the same service.
- Vertical: Involves companies engaged in different phases of the value chain for a good or service.
Equity Participation
A company acquires shares in another, leading to:
- Absolute control (+80% of equity)
- Majority control (+50% of equity)
- Minority interest
The participating companies do not lose their legal entity. The acquiring company is called the parent (or holding) company, and the acquired company is the subsidiary.
If the target company is publicly traded, a Public Offering of Shares (tender offer) may be required. A takeover bid is an offer to acquire shares at a price typically above the current market value. Takeovers can be:
- Friendly: With prior agreement from the target company’s managers.
- Hostile: Without prior agreement and potentially with opposition from the target company’s managers.
Business Cooperation and Alliances
These are intermediate links and relationships established between organizations through formal legal agreements or tacit understandings, without any party losing its legal personality. Types include:
- Union Temporal de Empresas (UTE) / Temporary Business Union: Temporary collaboration between companies to execute a specific project.
- European Economic Interest Grouping (EEIG): Allows individuals, corporations, and other legal entities from at least two EU member states to facilitate and promote the economic activities of its members by pooling resources, activities, and expertise.
- Long-term Contracts: Agreements focused on certain activities over an extended period.
- Franchise Agreement: An agreement where the franchisor grants the franchisee the right to use a trademark or established business model in exchange for periodic payments. The franchisor also provides technical and commercial assistance. The franchisee makes the initial investment and pays an entrance fee and regular fees.
- License Agreement: For the utilization of strong trademarks, patents, designs, etc.
- Outsourcing: The main company engages a subcontractor to carry out certain productive activities.
- Joint Venture: Two or more independent companies agree to create a new, jointly-owned entity to access new markets or undertake specific activities.
- Venture Capital / Risk Capital: A company provides long-term financing to another company, often through minority equity participation or by underwriting long-term debt, typically on a temporary basis.
- Consortium: A partnership between enterprises formalizing a long-term relationship among themselves and with a mutual organization composed of all members.
- Networks: A plurality of agreements and relationships among various participants.