Webinar Key Takeaways: Preparing for Life ‘Beyond the Virus’

Webinar Key Takeaways: Preparing for Life ‘Beyond the Virus’

Topic: Making It Up As You Go: The Blurring Lines Between Alliances and M&A

Here are our key takeaways from the webinar which took place on Wednesday 13th May.

Key Message: Since conditions are forcing us to do alliances instead of acquisitions, we certainly need to do them well

  • Uncertainty makes striking M&A deals much tougher; to access critical capabilities, firms forced to undertake alliances
    • Executives prefer the control and ownership aspects of M&A, uncomfortable with shared control, risk and reward associated with alliances
    • Uncertainty => hard to agree on prices, terms
    • In some industries, alliances have become an increasingly important way of building capabilities
  • While alliances “promise” speed, actually creating capabilities quickly is challenging, not automatic
    • Without structure and discipline, inherent differences between partners create overlaps (doubled work) and gaps in capabilities adding cost and slowing progress
    • There is a cost to creating that structure and discipline; requires people and resources with the right skills and incentives
  • Building trust is critical – both with alliance and M&A partners, and in the market (reputation) – but it’s not easy, not just an attitude or EQ, requires dedicated, disciplined management
    • Hiring and staffing the right “type” of people does matter
    • Must provide the organizational context to support, encourage, reward those people

 

Detailed Notes:

Uncertainty makes striking M&A deals much tougher; to access critical capabilities, firms forced to undertake alliances

  • Industrial conglomerates often compete for portfolio companies with PE players, who are often paying at least as much, if not higher multiples. This makes it difficult for strategic players to win the target and justify the high level of multiples relative to the value generated out of the acquisition
  • Due to the current crisis and upcoming recession, businesses have been focusing on their core capabilities and evaluating non-core areas that need to be divested. The business models are changing in the meantime, which makes it crucial for businesses to be equipped with a comprehensive set of capabilities. This leads to the need for collaboration
  • Need to think through whether strategic players have the skill (individuals) or capabilities (organisational) to do it. Hence a need for a disciplined playbook to frame the partnership
  • Back in 1999, the pharmaceutical companies needed to build capabilities but didn’t have the “muscles.” E.g. launching new products every year. This dragged people into thinking about partnership. At the same time, some people need to manage the partnerships; and this takes skills and best practices – A gap-filling strategy
  • Patent expiry was another big reason that pharma firms need to pursue alliances to fill their revenue gaps
  • Renewable project and construction is a cost game. Utility companies often forward sales through deciding on fixed strike prices. If current conditions lead to a drop in demand, this would drag down the energy prices, creating a need to make renewable energies even cheaper. And the way to do it is to form a strategic alliance along the supply chain.
  • Transparency between partners about project and cost base is important for innovation and subsequent cost savings
  • Larger firms with conservative corporate culture and long history tend to move slowly and are risk averse. Working with smaller, more agile firms can help shorten the decision-making process. This is especially true when it comes to market entrance where the smaller firms already established a presence

 While alliances “promise” speed, actually creating capabilities quickly is challenging, not automatic

  • No easy answer to “speed”. If two companies have a project together or any other forms of collaboration, the two get to know each other better
  • “Speed” is not automatic; partnering firms must design it into the way they work together, or they risk adding delays and costs through duplication and overlap
  • Another reason to keep an arms’ length relationship is the ability to choose a partner wisely instead of getting locked up in the long term
  • Tech firms were doing alliances much earlier than pharmaceutical companies. A core of companies gathered to learn from each other, ASAP developed a series of best practices and certification programmes. The organisations that employed the best practices had a 70-80% success rate, and see improvements in agility, speed and risk reduction
  • Large utility firms like to standardise the alliance process. Though depending on different partners, the processes don’t really follow a single structure. When collaborating with smaller firms which have exposure to the projects or local markets, the larger company brings in the know-how to turn the project into realisable opportunities
  • Local government municipalities (Germany) sometimes own shares in a large portfolio. They can become management intensive and often add in extra layer of costs. Hence the current effort is to try to make the collaboration smoother, slimmer and identify the maximum amount of synergy.
  • Due to the complexity in the shareholder agreements and voting rights, the ability to standardise the alliance becomes limited.
  • A JV is harder to manage than commercial alliances and JV can become a full on, requiring heavy involvement from both sides to make it work
  • Knowing the model and standardisation process is crucial as this brings in the right people and inform the accurate level of expectations. Getting the objectives aligned helps to speed up the process

Building trust is critical – both with alliance and M&A partners, and in the market (reputation) – but it’s not easy, not just an attitude or EQ, requires dedicated, disciplined management

  • Organisations needs to have a “mindset” for collaboration. This mindset lies in the attitudes and skills of its people, management’s approach, and core processes for managing those collaborations. People at all management level should be engaged in the partnership. The organisation needs to have the capability: process and orientation towards a new way of doing business. Structure is also needed to allow people to have their influence to permeate throughout an organisation
  • The easiest way to lose trust is when people’s intentions don’t match what they do or say. This loses the effect of collaboration
  • Collaboration mindset is key: the whole company needs to be ready for it. If not. Having that one person in the middle to coordinate everything and sell the collaboration mindset would be essential
  • Credibility: being credible to all parties in your own organisation and to the partner’s. E.g. Whilst doing JV with institutional investors, who operate assets in a different way, the middle person from a large utility company need to be a good negotiator
  • Commitment at the early stages of partnership, if managed correctly, cements the dynamic of partnerships. Imbalances occur if there’s more “take” than “give”
  • Make sure there’s a channel of communication and an ability to ask questions to investigate and resolve the uncertainty