Strategic alliances increasingly favored among dealmakers
A recent survey by Deloitte has discovered that the M&A market is changing. It seems the trend for takeovers and mergers has been replaced with more interest in joint ventures and other strategic alliances. This, however, comes with additional challenges that board members are keen to keep on top of.
The third annual Corporate Development Survey from Deloitte found that almost half of those questioned did predict an increase in M&A activity. However, in many industries – and particularly in manufacturing – many respondents predicted a rise in the numbers of strategic alliances taking place.
Deloitte’s head of M&A, Chris Ruggeri, explained, “There is a trend away from the kind of Hollywood-type deal making where you have two folks in a room and the objective is for one to come out a winner.
“Their mindset is changing from strategic alliances being seen as a last resort to being a preference.”
There are several possible reasons for the change in attitudes to strategic alliances. In the manufacturing industry for example, the move into emerging economies is part of the reason for the trend, along with the need for a wiser approach to spending in these new markets.
Despite the popularity of alliances, the survey found that a large number of respondents consider these types of deals to be more difficult to get right than mergers or acquisitions. Some 25 per cent said that they thought strategic alliances presented a larger problem to dealmakers than mergers.
When asked about the reasons why joint ventures and other strategic alliances break down, the top reasons given were firms’ inability to align strategies and partners having different views on fundamentals. Despite the challenges, dealmakers are not being put off, explained Ruggeri: “Strategic alliances and joint ventures can be difficult transactions. Nevertheless, we are seeing a notable uptick.” He went on to add that several markets are taking their lead from life sciences and technology firms that have managed to successfully undertake alliances while managing capital and risk.
The perceived challenges that come with strategic alliances could be one of the reasons why board members are growing increasingly active in the deal-making process, according to the Deloitte results. Over 40 per cent of the executives questioned by Deloitte said their board members were taking a more active role in dealmaking over the past two years. They said that board members are asking for more information about potential deals and are also deliberating over this information for longer.
At the same time, executives claim that their boards are not taking the time to evaluate the performance of various business divisions and potential divestitures. Ruggeri stated that failing to evaluate which divisions are underperforming “puts companies at risk of needing to be reactive rather than proactive when performance slips or when activists [investors] draw attention to a particular business.”
This, in turn, can lead to problems in completing a divestiture successfully. After all, a successful sale comes about as a result of thorough preparation and open information sharing. Some 28 per cent of the Deloitte respondents said that failure occurs as a result of a failure to prepare or poor quality information.
