4. Alternative Ownership Arrangements

In the corporate world, a deal does not necessarily have to involve the full ownership of the target firm. In fact, it is often easier to find an arrangement that does not involve full ownership, as these deal structures are easier to adjust and offer considerably more flexibility.

Possible ownership arrangements in corporate transactions range from loose agreements to full-fletched mergers. Typical transactions structures are:

  • Strategic alliances and Joint Ventures
  • Asset deals
  • Spin-offs, Split-offs, Carve-outs 
  • Partial firm acquisitions
  • Mergers and Acquisitions

  

In what follows, we briefly discuss some important aspects of these deal structures. 

 

Strategic Alliances / Joint Ventures

The key characteristic of strategic alliances and joint ventures is that the parties of the deal remain independent entities. They simply cooperate in specific areas, for example research and development or distribution. If the cooperation is based on a contractual agreement, we typically refer to it as a strategic alliance. In contrast, if the parties start a new company that they jointly own, this is usually called a joint venture. 

The rational of these deal structures is to bundle the core competences of each party without giving up independence. Alternatively, they are sometimes used to find out more about the counter party before taking it over or merging with it. Consequently, these solutions can be seen as options to acquire and expand.

A prominent example of a strategic alliance is the arrangement between Pfizer and Warner-Lambert for the distribution of Warner-Lambert's drug "Lipitor" in 1996. Warner-Lambert contributed the drug as a core competence whereas Pfizer contributed its distribution capabilities. Later, in 2000, Pfizer then acquired Warner-Lambert for approximately USD 90 billion.

  

Asset deals

Instead of acquiring the whole firm, the buyer could also just purchase some of the assets of the selling firm. Such asset deals are very common and the market for corporate assets is about as important as the M&A market. Firms divest assets for many different reasons. For example, they could have liquidity needs for other projects or they might feel that the asset in question no longer fits with the firm's strategy. Asset deals are also popular among financially troubled firms, where a full-firm acquisition might bring about a wide range of hidden liabilities and legal claims from other parties. 

  

Spin-offs (Split-offs, and Carve-outs)

In some cases, a disagreement between the buyer and the seller could also arises because the target has activities or assets that do not interest the buyer and are therefore less valuable to it. It could also be that the firm in question has assets with hidden liabilities or assets for which it has no comparative management advantage.

A possible solution for such constellations could be to spin off the activities in question. In a spin-off, parts of the selling firm's activities are oragnized in a legally independent firm. In exchange, the original shareholders of the selling firm receive shares of the newly created (spun off) firm on a pro-rata basis.

A prominent example of such a transaction is the $36 billion spin-off of Mondelez's global snack business into the Kraft Foods Group, Inc. back in 2012. With the transaction, each shareholder of Mondelez received 0.33 shares of the newly created Kraft Foods Group. The Kraft Foods Group later merged with Heinz in a deal valued at approximately $40 billion.

 

    Partial Ownership

    Instead of buying the whole firm, the acquirer could only purchase a stake in the target company and postpone full acquisition to a later date. Under such an arrangement, the the target firm has high-powered incentives to work hard to fetch a high price in the ultimate acquisition. At the same time, the buyer gains time to find out more about the firm.

    A prominent example of such an arrangement is the takeover of Genentech by Roche. Back in 1990, Roche acquired a controlling stake of about 60% of Genentech, along with an option to acquire the remaining shares. For almost a decade, Genentech then remained an independent company until Roche exercised its option and fully acquired Genentech in 1999.

    Interestingly enough, Roche later reissued about 20% of Genentech's stock, mostly because Genentech's manager wanted to maintain their compensation packages with Genentech stock. It took another 10 years and quite some forth and back between the two companies until Roche finally fully acquired Genentech in 2009. 

     

    Mergers and Acquisitions

    Full-firm acquisitions are then generally referred to as "Mergers and Acquisitions." While many commentators use these terms as synonyms, it is important to note that acquisitions and mergers have markedly different characteristics:

    • In an acquisition (or takeover), the buyer "simply" buys the shares of the target company. The target company remains legally independent and the only thing that factually changes is its ownership. 
    • In a merger, in contrast the entities in question combine forces and consolidate their activities in a joint organisation. Often, the acquired company is then absorbed by the acquirer and ceases to exist as a legally independent entity.

     

    A detailed discussion of these transactions goes beyond the scope of this module. In a separate module we will discuss some key aspects of the M&A process.

     

    In particular in the context of early ventures, the above deal structures are often not very fruitful. The reasons could be:

    • There is too much uncertainty to be able to find and eliminate the sources of disagreement 
    • The parties have different preferences with respect to cash flows and risk (for example, the investor wants stronger financial claims than what common stock offers).
    • There is not enough flexibility with respect to the ownership arrangement (for example, the entrepreneurs are not willing to give up control).
    • New ventures often have no extra assets to sell (the are a single project).
    • The "acquirer" is often a financial investor, not a strategic investor. Consequently, Alliances, joint ventures, mergers, and acquisitions would not result in material synergistic gains.

     

    In such situations, contractual arrangements become key. In what follows, we therefore take a look at typical contractual arrangements.