0:10
In the last video,
we looked at identifying candidates that help us to enter a new business.
In this video,
we're going to look at how to select the best relationship with those candidates.
These are our five steps.
We did identifying candidates, step three.
Now we're moving on to step four, ally or acquire.
0:31
In this step, we identify the best inorganic growth mode
which you then compare in the next step with organic growth.
So in a way if you look back to our growth tree.
What we're doing is resolving the tree from the bottom up.
Begin by comparing non equity alliance, equity alliance and M&A.
That's step four.
And then in step five,
we look at comparing inorganic growth with organic growth.
0:59
Let's go back to our example.
Sports cars diversifying into theme parks.
Here, we're considering a single theme parks company.
In reality, you would consider multiple theme parks companies
because some might be better suited than others.
How would you approach selecting the best inorganic modes?
One way to approach this is, start with the least invasive mode,
that is a non equity alliance and then think about,
can you do better by selecting the more invasive modes in equity alliance or M&A.
And you want to particularly focus on the synergies that you have identified
earlier.
Why, because this is where the value comes from.
And because they're dependent on jointly operating as the type of relationship
is crucial.
We had looked at three potential synergies.
R&D, branding and sales.
For R&D, we thought perhaps sports cars can help co design these theme parks.
For branding we said, maybe we can apply the Ferrari brand
to the theme parks business and for sales and service delivery we thought
maybe we can sell some of our Ferraris in the theme parks.
How much collaboration is required for each of these?
For R&D, a bit working together up front, seems to be necessary.
For branding, again, some working together seems necessary but
perhaps not that much ongoing collaboration.
For sales and service delivery, again it might not be that essential for
deep ongoing collaboration.
I can run my Ferrari store.
Someone else runs the theme parks.
Thus, it seems across all these synergies,
a close working relationship might not be required at least not on ongoing basis.
This would suggest that perhaps a non equity alliance could be sufficient.
3:08
To decide on the level of equity,
we need to think about what are the benefits of equity, and what are the costs?
I'll show you some generic factors that drive the benefits, and
I'll show you some other factors that drive the cost.
3:23
Equity gives you the possibility to forge close working relationships
which can be important for your synergies.
This close working relationship comes in two aspects.
First, coordination which is the alignment of action.
Equity helps you to align the actions across partners.
3:43
The second is cooperation.
If it helps you to align the incentive across partners.
Now some of the specific questions that you can ask to think about whether those
benefits are needed or desirable in your setting are listed here.
For coordination, is there a need for close working relationship?
Or is there extensive knowledge sharing required between the partners?
4:15
Are the gains from synergies one sided between partners?
That means, if we work together, yes, they're some gains.
But perhaps, it's only one partner gaining and the other not.
Equity allows you to distribute these gains more equally.
Lastly, equity not only helps for close working relationships.
It also helps for exclusive working relationships.
If you have an ownership stake in the partner, it's easier for
you to control access to that partner.
You might for example want your rivals not be able to access that partner
which you can do if you have a big equity stake but
is very hard to do if you don't have an equity stake.
5:00
We should not only think of the benefits of equity,
we should also consider it's cost.
The most direct cost are those to acquire full or partial control.
Typically, for
bigger equity stakes, you usually need to pay a sizable control premium.
The second aspect you need to consider
when looking at the cost of equity ownership is uncertainty.
If uncertainty is very high, you run the risk of paying a control premium for
a business or a company that turns out to be not that valuable.
Thus, the higher the uncertainty, the higher the cost of equity because
the risk is higher that the asset or the resource turns out to be not valuable.
The last point that we need to consider is motivation.
It could be that a higher equity stake
could harm the resource you want to access.
This is often the case when the key resource are people.
People could lose their motivation if you come in with a big equity ownership stake.
It basically means they may have to give up autonomy.
If you want to invest in people intensive resources, you have to
carefully consider whether that equity stake will influence employee motivation.
6:16
Now we can decide on the best inorganic growth mode.
If the benefit of equity is very high but the cost are very limited,
then you would go for high equity meaning M&A.
If on the other hand, the cost are very large but
the benefits are not really there, you would settle for a non equity alliance.
Now what would you do if both the benefits are high of equity ownership but
also its cost.
Now we can basically do two things.
We could settle for something in between, inequity alliance.
Or we could go back to our synergy analysis, and
really think about the synergies that is most valuable for us.
Then we could think about, let's pick the inorganic growth mode that is best for
that given synergy.
Bart VannesteAssociate Professor
