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Graceful Exit

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Graceful Exit

All alliances end eventually. The average joint venture lasts 7 years, with almost 80% end up in a sale to one of the partners. Non-equity alliances often have shorter life spans. For example, the marketing alliances in high-tech and retail business usually last a maximum of two years.Termination is natural in any alliance life cycle. In order to improve the termination process, companies need to take a broader and more strategic view of alliance termination and need to do so during the initial phrases of venture creation. Company needs assessment of both strategic and contractual considerations.

Strategies to Shape termination

Strategic considerations are factors outside the detailed legal language of the alliance contract that define the path of termination.

5 merit special attention:

Set clear termination goal

Make appropriate contribution to the alliance.

Keep the deal structure flexible.

Institute effective human resource policies.

Develop a portfolio of options.

Clear Termination Goals

  • Before entering an alliance, the deal-making team should think of a list of three to ten termination goals.

  • The list may include:

    • Maintaining control over contributed assets

    • Receiving a fair market price for those assets

    • Preserving positive relations with this partner in the future

    • Terminating the alliance quickly

  • The list will help shape important decisions around contributions, deal structure, human resource policies, and options for alternative ways of achieving the alliance’s purpose.

Appropriate Alliance Contribution

  • Companies agree to make a certain contributions available to the partner or to the venture when they enter into an alliance.

  • The more deeply the partners integrate their contributions, the more difficult exit becomes.

  • Firms needs to consider ways to provide contributions that are coordinated rather than combined.

  • Coordination means that the partner position themselves to provide essentially separate contributions to the alliance at different points in the value chain.

Appropriate Alliance Contribution (Cont.)

  • Firms should also consider the complexity of contributions

  • When firms contribute high amount of inputs or competencies, termination will be a lot less attractive for the partner because competencies are much harder for partners to learn over the existence of the alliance.

  • To prevent premature termination, make sure that at least some contributions to the alliance are complete competencies, including retail site selection, financial management and so on.

Flexible Deal Structure

  • Some way of structuring an alliance facilitate exit more than others. E.g. BP and Mobil structured their European downstream oil consolidation as two separate JVs.

  • In the high-tech field, the alliances are structure as a series of short-term renewable contracts. It can smooth the exit process in highly uncertain environments that do not require deep asset integration between the partners.

  • Forming broad relationships can also improve exit performance. Because when two firms have many operational initiatives, it will be easier to cut out the underperforming piece of the relationship and it is easy to transfer people and other corporate resources from one initiative to another with the same partner, therefore reducing the termination costs.

Flexible Deal Structure (Cont.)

  • Other structural issues might as well be considered. For instance, managers can ask questions such as :

    • Would a joint venture best serve our exit goals?

    • Would a direct investment in or from the partner have a material effect?

      Although, these questions may not lead to decisions different to those the firm have taken, we believe that the best firms do make decisions based on overall exit goals.

Effective Human Resource Policies

  • Appoint an executive sponsor- increases the chances that the alliance will not die too soon

  • Rotate alliance managers- an underappreciated risk in alliance is that the alliance manager will become too connected to the partner and lose focus on the company own best interest

  • Create a clear career path for alliance management- when manager see alliances as a profession they are less prone to defend an alliance at all cost

Human resources policies can also shape termination process and performance.

Portfolio of options

  • It can be useful to create alternatives or option incase the alliance fails

  • Alliance can fail for many reason and many of the reasons are outside firm control

  • Termination success can rely on having other alternatives in option

  • Winning exit depends on many strategic considerations

Contractual terms governing termination

Termination success is depend on the details in the alliance contract, firm should be focus on four contractual dimensions which are trigger events, future ownership rights, valuation methods, and post termination demands.

Trigger Events

The first step is to determine what events will trigger termination that will allow the corporate parent to end the alliance. There are & broad categories of triggering events

  • Alliance Completion- It often makes sense to indicate that the partners have the right to terminate the alliance when the venture crosses certain time, technological, financial, or market thresholds. 

  • Alliance performance failure- The partners may want to have the option to end the alliance if the venture or one of the partners fails to achieve some predetermined performance milestone. 

  • Change in external environment- Changes in the external environment can have the effect on the future of the alliance, the partner may want to indicate which of these events will trigger termination rights

Trigger Events(Cont.)

4.Change in parent status- firm should also consider whether certain changes in the status of the corporate parents should prompt termination rights. These changes may also relate to financial health, including the bankruptcy

5.Parent breach- the most common exit trigger is breach of contract that one partner fails to meet its basic obligations to the agreement

6.Parent deadlock- an alliance contract should indicate what will happen if the partners deadlock on critical decisions, the best agreement is to include resolution mechanisms for example a process for appealing the decision for higher levels position within the parent companies

7.Termination at will- It is in the strategic interest of the parents to simply allow the partners to terminate the alliance whenever desired. This tend to make sense only when the alliance entails very limited resource integration between the firm

Future Ownership Rights

The alliance contract needs to spell out who will own the alliance related assets in the future once termination rights have been triggered and closure is the chosen course.

For non-equity alliances, this can be straightforward exercise. Each partner simply retains the assets it lent to the alliance. However, the contract will also need to address the ownership of ideas and other intellectual assets created in the course of the alliance. Typically, this can be done in one of two ways.

1. One is allow the partners to share rights.

2.The other approach is for one partner to control most or all of intellectual assets. This is usually the one who funding the alliance.

Future Ownership Rights(Cont.)

For joint ventures, it is hard or impossible to return the contributions to the corporate parents. This is because within a few years, most joint ventures have fully integrated. Hence, it is no longer possible to determine who owns what. Therefore, when firms decide to terminate a joint venture the contract needs to address who will take the ownership of the business and how the exiting partner’s stake will be valued.

Valuation Methods

The contract should indicate how firms will value the business in the event of termination. Otherwise, a firm can be led to unwanted outcomes such as assets valued at below-market prices or protracted legal battles with its partner. There are three basic models for valuing assets in joint ventures.

The first one is roulette. Here, one firm (usually the one that exercises the right to terminate) places a dollar value on the total business, and the other partner determines whether it wants to buy or sell its interest based on that price.

Another model is to allow an independent assessor such as an investment bank to set a price on the assets.

The last model is to set a predetermined price or pricing formula for the business. For example, the venture contracts reportedly stated that if one partner decided to terminate at will, the other partner could buy its share back at a 10 percent discount on a fair’s market assessment of the firm’s interest.

Post-Termination Demands

The alliance contract also needs to indicate whether the partners will have any future demands placed upon them after the alliance terminates. Such demands can be divided into future relationships, restrictions, and responsibilities.

Future relationships – The firms may decide that some continued links are needed after the alliance has ended. For example, a new business JV may depend on some or all corporate parents for ongoing access to certain brand names, technological know-how, or material supplies.

Future restrictions – It is common for the partners to have at least some restrictions placed upon them when the alliance is terminated. For example, non-competing in a certain product or geographical area for a period, prevent poaching staff from the former partner.

Future responsibilities – Sometimes, terminated alliances have remaining obligations to customers, suppliers, or other parties. The firms have to deal with them as best as they can in the contract although the alliance is already terminated.

Think Ahead, Work Backward

To get started, members of the deal team can pose some questions about the potential alliance. By answering these questions, managers will gain new appreciation for the timing, path, and tasks of alliance termination. The examples of these questions are:

  • What is the realistic life span of the alliance?

  • What are the ten most likely reasons that the alliance will end?

  • Are there natural decision points for terminating or recommitting to the alliance?

  • On the scale of 1 to 10, how large are the termination risks? (1 = no material effect on our firm; 10 = threatens our very survival.)

  • What are the main termination goals in this alliance?

Think Ahead, Work Backward(Cont.)

  • Will certain alliance structures or asset contributions make it much easier for us to exit the alliance, or harder for the partner to do so?

  • Is it in our interest to make it harder for our partner to exit the alliance?

  • What will be the five hardest tasks in closing down the alliance?

  • Are there ways to create options today in case this alliance fails tomorrow

The point in asking these questions is to spark a general discussion among team members and to gain a deeper appreciation of termination issues before entering the alliance.

Thank you for your attention

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