Merger & Acquisition Focus Strategic alliances When two is better than one Snake in the grass Employee-related liabilities can poison your deal M&A insurance can shield your deal from risk Ask the Advisor February/March 2009 www.herrera.com 600 Jefferson, Suite 1080 ♦ Houston, Texas 77002-7363 (713) 978-6590 ♦ Fax (713) 978-6599 Strategic alliances When two is better than one 2 A strategic alliance may be an option for grow￾ing companies when a sale or acquisition isn’t feasible. In fact, carefully chosen and executed alliances can yield many of the benefits of a success￾ful merger — including increased revenue and market share and the acquisition of key employees — but without the time, cost or hassle. Venturing out Say you need to raise capital to effectively compete in your market, but also want to retain ownership and full control of your company. A joint venture — a common, but complex type of strategic alliance — may be the solution. Joint ventures require participating companies to create a separate legal entity (generally a corpora￾tion, limited liability company or partnership), of which all participating companies are partners and through which the new business will be conducted under strict operating agreements. Though joint ventures can face many of the same integration challenges of standard mergers — plus the additional challenges involved in jointly managing a company — they allow you to share some of the risk. They can also potentially gener￾ate valuable synergies that, for example, yield more robust product lines, greater geographical reach and cost reductions related to scale while enabling participating companies to manage their own core competencies. In addition, pooling your resources in a joint venture may enable you to: v Take on projects that are larger than you would normally accept, v Boost your bidding power and bonding capacity, v Tap the unique skills and ideas of a different organization — possibly revitalizing your own, and v Increase your ability to raise capital. A joint venture maintains its own accounting records and produces financial statements that are independent of each participating company’s financial records (though the joint venture is noted in those companies’ financial statements). Your percentage of ownership and level of control in the joint venture dictate the accounting method — cost, Help ensure a successful partnership by choosing a company that shares similar values and business philosophies. equity or full consolidation — used to report joint venture activity. Most joint ventures are limited in scope to a single project or product, but they can also operate indefinitely. Contractual arrangements Contractual arrangements offer a simpler form of strategic alliance. These short-term collaborations may be appropriate when you don’t require a formal management structure. The contract’s specific provi￾sions will depend on the complexity of the business arrangement, but it should discuss the duties and responsibilities of each party, confidentiality and non￾competition, payment terms, and intellectual property. Also be sure you enter a contractual arrangement with an exit strategy in mind. A contractual alliance might be formed when two businesses partner to distribute products, but share few financial resources. (See “Looking for less com￾mitment?”) On a larger scale, two companies might both make significant financial contributions to fund capital-intensive investments such as those in facili￾ties and equipment. Many contractual alliances grow into more significant businesses for their participants. So regardless of the type of alliance you choose, seek expert advice to assess your initial legal, financial and operating risks and benefits as well as those that potentially come into play down the road. A perfect match You should never enter into a strategic alliance without carefully considering the risks. These include corporate culture clashes and loss of control over operation