Deck 15: Business Alliances: Joint Ventures, Partnerships, Strategic Alliances, and Licensing

Question 1

Explain why GE might have been willing to accept subordinated debt and preferred stock for such a large part of the purchase price? Why might Comcast want to use debt and preferred equity as part of the purchase price?

Answer 1

GE was in a hurry to exit NBCU entirely due to a desire to focus on its core industrial businesses and due to cultural differences. Also, GE's expectations for growth in the value of media companies may differ significantly from Comcast's. GE may also have wanted to defer the payment of taxes on a portion of the gain they may have realized on the sale of their minority position. Comcast was eager to use debt and preferred stock due to current low interest rates and dividend yields. Also, the use of debt and preferred stock lowered the present value of the purchase of GE's minority interest to Comcast.

Question 2

Strategic alliances generally create separate legal entities in order to achieve their business objectives.

Answer 2

False

Question 3

joint venture is rarely an independent legal entity such as a corporation or partnership.

Answer 3

False

Question 4

10 Through its alliance with Best Buy, Microsoft is selling its products-including Microsoft Network (MSN) Internet access services and hand-held devices such as digital telephones, hand-held organizers, and WebTV that connect to the Web-through kiosks in Best Buy's 354 stores nationwide. In exchange, Microsoft has invested $200 million in Best Buy. What were the motivations for this strategic alliance?

Question 5

is defining the scope of a business alliance important?

Question 6

6 In 2005, Google invested $1 billion for a 5 percent stake in Time Warner's America Online unit as
part of a partnership that expands their existing search engine deal to include collaboration on
advertising, instant messaging, and video. Under the deal, Google will have the usual customary
rights afforded a minority investor. What rights or terms do you believe Google would have
negotiated in this transaction? What rights or terms do you believe Time Warner might want? Be
specific.

Question 7

Business alliances may represent attractive alternatives to mergers and acquisitions.

Question 8

Major motivations for business alliances include risk sharing as well as gaining access to new markets and skills.

Question 9

Obtaining additional investment funds from others is the primary motivation for creating various types of alliances.

Question 10

are the critical assumptions underlying Comcast's decision to exercise its option to acquire the remainder of NBCU that it did not own at an earlier date than anticipated? What are GE's?

Question 11

is a limited liability company? What are its advantages and disadvantages?

Question 12

what way can the Comcast/GE JV created in 2011 be viewed as a phased entry strategy into owning content for Comcast and as a phased exit strategy for GE?

Question 13

7 In late 2004, Conoco Phillips (Conoco) announced the purchase of 7.6 percent of Lukoil's (a
largely government owned Russian oil and gas company) stock for $2.36 billion during a
government auction of Lukoil's stock. Conoco will have one seat on Lukoil's board. As a
minority investor, how could Conoco protect its interests?

Question 14

8 In 1999, Johnson & Johnson (J&J) sued Amgen over their 14-year alliance to sell a blood-enhancing treatment called erythropoietin. The relationship had begun in the mid-1980s with J&J helping to commercialize Amgen's blood-enhancing treatment, but the partners ended up squabbling over sales rights and a spin-off drug. The companies could not agree on future products for the JV. Amgen won the right in arbitration to sell a chemically similar medicine that can be taken weekly rather than daily. Arbitrators ruled that the new formulation was different enough to fall outside the licensing pact between Amgen and J&J. What could these companies have done before forming the alliance to have mitigated the problems that arose after the alliance was formed? Why do you believe they may have avoided addressing these issues at the outset?

Question 15

is the form of payment and acquisition? What portion of the purchase price might be immediately taxable to GE and on what portion might taxes be deferred and why?

Question 16

5 What are the common reasons for the termination of a business alliance?

Question 17

4 What are the advantages and disadvantages of the various organizational structures that could be
employed to manage a business alliance?

Question 18

Discuss ways of valuing tangible and intangible contributions to a JV.

Question 19

Speculate as to why GE may have found it difficult to manage NBC Universal. Be specific.

Question 20

9 In late 1999, General Motors (GM), the world's largest auto manufacturer, agreed to purchase 20% of Japan's Fuji Heavy Industries, Ltd., the manufacturer of Subaru vehicles, for $1.4 billion.
Why do you believe that General Motors may have wanted to limit initially its investment to 20%?

Question 21

Who receives rights to distribute, manufacture, acquire or license technology, or purchase future products or technology is an issue usually resolved in defining the scope of the alliance.

Question 22

Strategic alliances often make use of written contracts rather than more formal legal structures such as a corporation.

Question 23

U.S. antitrust regulatory authorities generally view the creation of R&D alliances among businesses in the same industry as anticompetitive, even if the alliance shares its research with all alliance participants.

Question 24

How ownership interests will be transferred in a business alliance is a relatively unimportant deal structuring issue.

Question 25

JVs established as partnerships typically raise capital through increased contributions from existing partners or through the issuance of limited partnership interests to investors, with the sponsoring firms becoming the general partners.

Question 26

Foreign companies having a minority ownership position in international business alliances rarely have control over the alliance even though they may possess much of the expertise required to manage the alliance.

Question 27

Equity owners or partners usually make contributions of cash or assets in direct proportion to their ownership or partnership interests. If one party chooses not to make a capital contribution, the ownership interests of all the parties are adjusted the changes in their cumulative capital contributions.

Question 28

In setting up business alliances, the initial focus of the parties involved should be on determining the appropriate legal structure.

Question 29

cross-marketing relationship is one in which one party to the agreement agrees to sell to its customers the products or services of another firm.

Question 30

Poorly defined roles and responsibilities are an important factor contributing to the failure of many alliances to achieve their objectives.

Question 31

Purchaser-supplier relationships are also called logistics alliances.

Question 32

Parent firms sometimes contribute a subsidiary to a partnership as a prelude to eventually exiting that business.

Question 33

In terms of important deal structuring issues, scope outlines how broadly the alliance will be applied in pursuing its purpose.

Question 34

The major disadvantages of a sub-chapter S corporation are that the number of shareholders is limited, corporate shareholders are excluded, it must distribute all of its earnings, the liability of shareholders is limited, and it can issue only one class of stock.

Question 35

A corporate legal structure is seldom used in implementing business alliances, because it may be subject to double taxation and significant set up costs.

Question 36

In limited liability companies, owners must also be active participants.

Question 37

Failure to define scope adequately can result in situations in which the alliance may be competing with the products or services offered by the parent firms.

Question 38

Companies wishing to do business abroad often enter into an alliance with an indigenous company to facilitate entry into a foreign market. The foreign company is usually the majority owner in such relationships.

Question 39

In partnerships, the allocation of profits and losses among partners will normally follow directly from the allocation of shares or partnership interests.

Question 40

Unlike other legal structures, a corporate structure does not have to be dissolved because of the death of the owners or if one of the owners wish to liquidate their ownership position.

Question 41

Business alliances may represent attractive alternatives to merges and acquisitions.

Question 42

Successful alliances are usually characterized by partners who have attributes that either complement existing strengths or significant weaknesses.

Question 43

The automotive industry rarely uses alliances to provide additional production capacity, distribution outlets, technology development, and parts supply.

Question 44

Alliance agreements must be flexible enough to be revised when necessary and contain mechanisms for breaking deadlocks, transferring ownership interests, and dealing with the potential for termination.

Question 45

Joint venture and alliance agreements often limit how and to whom parties to the agreements can transfer their interests.

Question 46

Business alliances usually exist for decades.

Question 47

Joint ventures sometimes represent good alternatives to an outright merger.

Question 48

The success rate among business alliances is usually much higher than for mergers and acquisitions.

Question 49

The desire to share risk is a common motive for a business alliance.

Question 50

Business alliances may assume a variety of legal structures.

Question 51

Business alliances often receive favorable antitrust regulatory treatment.

Question 52

In general, business alliances are not intended to become permanent arrangements.

Question 53

The number of business alliances established each year is usually much smaller than the number of mergers and acquisitions.

Question 54

Control of business alliances is most often accomplished through a steering committee.

Question 55

With respect to joint ventures, so-called distribution issues relate to dividend policies and how
profits and losses are allocated among the owners.

Question 56

Termination provisions in the alliance agreement should not include buyout provisions enabling one party to purchase another's ownership interests.

Question 57

Business alliances generally do not exhibit a higher success rate than mergers and acquisitions.

Question 58

Project-oriented JVs often are viewed unfavorably by regulators.

Question 59

Empirical studies show that the business alliance announcements seldom have any impact on the market value of their parent firms.

Question 60

The written contract is the simplest legal structure and most often is used in strategic alliances.

Question 61

Which of the following is not a typical characteristic of a licensing arrangement?

A) Obtaining the rights to use a particular type of technology.
B) Obtaining a controlling interest in another firm
C) Obtaining patent rights
D) Paying royalties in direct proportion to revenues generated by the agreement
E) Utilizing another firm's trademark to market your product

Question 62

Because the limited liability company offers its owners the significant advantage of greater flexibility in allocating profits and losses and because the LLC is not subject to the many restrictions of the S-Corporation, the popularity of the S-corporation has increased.

Question 63

Which of the following is not a motivation for establishing an alliance?

A) Risk sharing
B) Gaining access to new markets
C) Gaining access to a new technology
D) Achieving maximum control
E) Entering into a foreign market

Question 64

Which one of the following is not a characteristic of a corporate legal structure?

A) Unlimited liability
B) Double taxation
C) Continuity of ownership
D) Managerial autonomy
E) Ease of raising money

Question 65

Top management of the parents of a business alliance should not involve themselves aggressively and publicly, as this may tend to stifle alliance management's risk taking and creativity.

Question 66

Which of the following is not a typical question that must be addressed in defining scope?

A) Which products are included
B) Which products are excluded
C) How are profits are losses to be allocated
D) Who receives rights to distribute, manufacture, acquire, or license or purchase future products developed by the alliance
E) Which partner will sell which products in which markets

Question 67

Unlike a limited partnership, the LLC is taxed on all profits before they are paid out to its members.

Question 68

The length of time an alliance agreement remains in force depends on the partners' objectives, the availability of resources needed to achieve these objectives, and the accuracy of the assumptions on which the alliance's business plans are based.

Question 69

Successful alliances are often those in which the partners contribute money, which is generally more important than a specific skill or resource.

Question 70

The choice of legal structure should be made before the parties to the business alliance are comfortable with the venture's objectives, potential synergy, and preliminary financial analysis of projected returns and risk.

Question 71

Unlike limited partnerships, LLC organization agreements do not require that they be dissolved in case of the death or retirement or resignation of any member.

Question 72

The formation of a successful alliance requires that a series of issues be resolved before signing an alliance agreement.

Question 73

Which of the following are examples of business alliances?

A) Mergers
B) Acquisitions
C) Joint ventures
D) Equity partnerships
E) C and D

Question 74

Efforts to insist on a detailed written agreement or contractual relationship may be viewed as offensive in some cultures.

Question 75

Equity partnerships commonly are used in purchaser-supplier relationships, technology development, marketing alliances, and in situations in which a larger firm makes an investment in a smaller firm to ensure its continued financial viability. This is important because it ensures one partner has dominant control over the partnership.

Question 76

Unlike other legal forms, the C corporate structure has an indefinite life as it does not have to be dissolved as a result of the death of the owners or if one of the owners wishes to liquidate their ownership position.

Question 77

An alliance whose purpose is to commercialize products developed by the partners generally should be broadly defined in specifying what products or services are to be offered, to whom, in what geographic areas, and for what time period.

Question 78

Successful alliances generally do not hold managers directly accountable for their actions, since that would tend to stifle risk taking.

Question 79

The life of the LLC is determined by the owners and is generally set for a fixed number of years in contrast to the typical unlimited life for a corporation.

Question 80

Under a C corporate structure, ownership can be easily transferred, which facilitates raising money.