Deck 15: Business Alliances: Joint Ventures, partnerships, strategic Alliances, and Licensing

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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 5

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 6

Purchaser-supplier relationships are also called logistics alliances.

Question 7

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

Question 8

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

Question 9

A 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 10

Business alliances may represent attractive alternatives to mergers and acquisitions.

Question 11

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

Question 12

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

Question 13

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 14

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

Question 15

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

Question 16

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 17

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 18

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

Question 19

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 20

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 21

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

Question 22

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

Question 23

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

Question 24

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 25

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

Question 26

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

Question 27

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

Question 28

Business alliances usually exist for decades.

Question 29

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

Question 30

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

Question 31

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

Question 32

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 33

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 34

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 35

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

Question 36

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

Question 37

Joint ventures sometimes represent good alternatives to an outright merger.

Question 38

Business alliances often receive favorable antitrust regulatory treatment.

Question 39

Business alliances may represent attractive alternatives to merges and acquisitions.

Question 40

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

Question 41

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 42

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

Question 43

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

Question 44

Business alliances may assume a variety of legal structures.

Question 45

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

Question 46

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 47

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

Question 48

Which of the following are examples of business alliances?

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

Question 49

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 50

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 51

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

Question 52

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

Question 53

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 54

Project-oriented JVs often are viewed unfavorably by regulators.

Question 55

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 56

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

Question 57

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 58

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

Question 59

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

Question 60

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 61

British Petroleum and Russia's Rosneft Swap Shares
Extending its already close ties with Russia, British Petroleum PLC announced an agreement to exchange shares with Russia's largest oil company, OAO Rosneft, on January 14, 2011. Rosneft is 75% owned by the Russian government. BP and Rosneft also announced the formation of a JV to develop three massive offshore exploration blocks that Rosneft owns in northern Russia. The two firms said they will jointly explore three areas in the South Kara Sea in the Russian Arctic, spending between $1.4 and $2 billion on seismic tests and drilling wells in the initial exploration phase. The JV will be two-thirds owned by Rosneft, with the remainder owned by BP.
Reflecting Europe's escalating dependence on Russia for an increasing share of its energy usage, particularly for clean-burning natural gas, the agreement is backed by Britain's prime minister, David Cameron, and Russia's prime minister, Vladimir Putin. Russia holds one-fifth of the world's proven reserves of natural gas, and, by some estimates, the South Kara Sea contains some of the largest reserves of oil and gas in the world.
The deal comes in the wake of BP's sale of assets to raise funds to cover the costs of the Gulf of Mexico oil spill in mid-2010. Such costs are expected to eventually total $40 billion. Rosneft, which had announced in late 2010 that it was seeking a partner for exploiting its Arctic leases, indicated that BP's experience in dealing with such problems gives it an edge over other potential partners. Rosneft also regards BP's deep-water drilling technology and experience as cutting edge. BP's expertise received another vote of confidence when Australia granted BP licenses to initiate extensive drilling activity off its coast several days after the Rosneft announcement.
The share exchange gives Rosneft a 5% interest in BP's voting shares, making it BP's single largest shareholder. In return, BP receives a 9.5% ownership stake in Rosneft. Each stake is valued at about $7.8 billion. Both firms agreed to hold each other's equity for at least two years before selling any stock. BP's shares currently pay a dividend about twice that of Rosneft's. BP and Rosneft have stated publicly that they believe investors have significantly undervalued their firms. The Russian government has a particularly strong interest in seeing the value of its holdings appreciate, since it announced plans to privatize a number of largely state-owned enterprises, including Rosneft, in 2014 in order to raise funds.
At the time of the announcement, BP's market capitalization was about $154 billion. With almost 90% of its shares owned by the Russian government and Sherbank, Russia's biggest retail savings bank, the firm's stock trading in public markets tends to be limited and not reflective of Rosneft's true value. However, the terms of the share exchange imply a market capitalization for Rosneft of about $81 billion.
The transaction represents the first time there has been a cross-shareholding between major international oil firms and a major government-owned national oil company. Unlike more conventional oil and gas JVs, the Rosneft JV will not own the oil leases but merely the right to develop them. This structure is similar to Russian oil company Gazrpom's agreement with France's Total SA and Norway's Statoil for the development of the Shtokman gas field in early 2008.
Rosneft became Russia's leading extraction and refining company after purchasing assets of former privately owned oil giant Yukos at state-sponsored auctions, in which the global community decried what appeared to be the Russian government expropriation of the privately owned assets. In 2006, Rosneft conducted one of the largest IPOs in history by issuing nearly 15% of its shares on the Russian Trading System and the London Stock Exchange. With the shares priced at $7.55 each, the offering raised about $10.7 billion. Most of the proceeds went to the Russian government. BP began its relationship with Rosneft by buying $1 billion in shares in the firm's initial public offering, equivalent to 1.3%. Thus, the recent agreement brings BP's ownership interest in Rosneft to 10.8%.
Previous attempts to invest in Russia and to create partnerships between Russian state oil companies and Western oil firms have failed due to outright expropriation by the Russian government or heavy-handed tactics employed by certain Russian billionaires (so-called oligarchs) with close ties to the Russian government. For example, Russian officials forced Shell Oil to sell control of its Sakhalin II oil and gas development to state-owned Gazprom. BP and Gazprom signed a global joint venture in 2007 in which each was to contribute assets valued at $1.5 billion, but it was later dissolved due to disagreements between BP and large Russian investors. TNK-BP, BP's 50 percent-owned JV with a group of Russian billionaire business people, has also had a troubled history. The JV that contributes a quarter of BP's global production and nearly a fifth of its reserves was rocked by a shareholder dispute in 2008 that cost BP some of its control. BP chief executive Bob Dudley had served as chief executive of that JV for five years until he was expelled by BP's Russian partners during the disagreement.
On news of the agreement, BP's partners in the TNK-BP JV stated that BP had not notified them adequately and that the Rosneft deal violated their "right of first refusal" as stated in the JV agreement. The partners were successful in getting a court injunction in the United Kingdom to block the implementation of the JV in February 2011. TNK-BP at the time of this writing is considering a legal claim against BP for damages of up to $10 billion for allegedly reneging on its commitment to use TNK-BP as its main vehicle for investment in Russia. These developments raise serious questions about the longer-term viability of the BP-Rosneft JV.
:
What is the purpose of the 2-year lockup period during which neither partner can sell its stock? How might the lock-up period impact the value of each firm's holdings?

Question 62

Which of the following is generally not true of a business alliance?

A) Tax considerations are often the primary motivation for forming the alliance
B) The events triggering dissolution of the alliance are generally spelled out
C) Remaining partners have a right of first refusal if one partner chooses to exit the partnership
D) One partner is generally responsible for day-to-day operations
E) Allocation of profits and losses follow from the allocation of shares or partnership interests

Question 63

British Petroleum and Russia's Rosneft Swap Shares
Extending its already close ties with Russia, British Petroleum PLC announced an agreement to exchange shares with Russia's largest oil company, OAO Rosneft, on January 14, 2011. Rosneft is 75% owned by the Russian government. BP and Rosneft also announced the formation of a JV to develop three massive offshore exploration blocks that Rosneft owns in northern Russia. The two firms said they will jointly explore three areas in the South Kara Sea in the Russian Arctic, spending between $1.4 and $2 billion on seismic tests and drilling wells in the initial exploration phase. The JV will be two-thirds owned by Rosneft, with the remainder owned by BP.
Reflecting Europe's escalating dependence on Russia for an increasing share of its energy usage, particularly for clean-burning natural gas, the agreement is backed by Britain's prime minister, David Cameron, and Russia's prime minister, Vladimir Putin. Russia holds one-fifth of the world's proven reserves of natural gas, and, by some estimates, the South Kara Sea contains some of the largest reserves of oil and gas in the world.
The deal comes in the wake of BP's sale of assets to raise funds to cover the costs of the Gulf of Mexico oil spill in mid-2010. Such costs are expected to eventually total $40 billion. Rosneft, which had announced in late 2010 that it was seeking a partner for exploiting its Arctic leases, indicated that BP's experience in dealing with such problems gives it an edge over other potential partners. Rosneft also regards BP's deep-water drilling technology and experience as cutting edge. BP's expertise received another vote of confidence when Australia granted BP licenses to initiate extensive drilling activity off its coast several days after the Rosneft announcement.
The share exchange gives Rosneft a 5% interest in BP's voting shares, making it BP's single largest shareholder. In return, BP receives a 9.5% ownership stake in Rosneft. Each stake is valued at about $7.8 billion. Both firms agreed to hold each other's equity for at least two years before selling any stock. BP's shares currently pay a dividend about twice that of Rosneft's. BP and Rosneft have stated publicly that they believe investors have significantly undervalued their firms. The Russian government has a particularly strong interest in seeing the value of its holdings appreciate, since it announced plans to privatize a number of largely state-owned enterprises, including Rosneft, in 2014 in order to raise funds.
At the time of the announcement, BP's market capitalization was about $154 billion. With almost 90% of its shares owned by the Russian government and Sherbank, Russia's biggest retail savings bank, the firm's stock trading in public markets tends to be limited and not reflective of Rosneft's true value. However, the terms of the share exchange imply a market capitalization for Rosneft of about $81 billion.
The transaction represents the first time there has been a cross-shareholding between major international oil firms and a major government-owned national oil company. Unlike more conventional oil and gas JVs, the Rosneft JV will not own the oil leases but merely the right to develop them. This structure is similar to Russian oil company Gazrpom's agreement with France's Total SA and Norway's Statoil for the development of the Shtokman gas field in early 2008.
Rosneft became Russia's leading extraction and refining company after purchasing assets of former privately owned oil giant Yukos at state-sponsored auctions, in which the global community decried what appeared to be the Russian government expropriation of the privately owned assets. In 2006, Rosneft conducted one of the largest IPOs in history by issuing nearly 15% of its shares on the Russian Trading System and the London Stock Exchange. With the shares priced at $7.55 each, the offering raised about $10.7 billion. Most of the proceeds went to the Russian government. BP began its relationship with Rosneft by buying $1 billion in shares in the firm's initial public offering, equivalent to 1.3%. Thus, the recent agreement brings BP's ownership interest in Rosneft to 10.8%.
Previous attempts to invest in Russia and to create partnerships between Russian state oil companies and Western oil firms have failed due to outright expropriation by the Russian government or heavy-handed tactics employed by certain Russian billionaires (so-called oligarchs) with close ties to the Russian government. For example, Russian officials forced Shell Oil to sell control of its Sakhalin II oil and gas development to state-owned Gazprom. BP and Gazprom signed a global joint venture in 2007 in which each was to contribute assets valued at $1.5 billion, but it was later dissolved due to disagreements between BP and large Russian investors. TNK-BP, BP's 50 percent-owned JV with a group of Russian billionaire business people, has also had a troubled history. The JV that contributes a quarter of BP's global production and nearly a fifth of its reserves was rocked by a shareholder dispute in 2008 that cost BP some of its control. BP chief executive Bob Dudley had served as chief executive of that JV for five years until he was expelled by BP's Russian partners during the disagreement.
On news of the agreement, BP's partners in the TNK-BP JV stated that BP had not notified them adequately and that the Rosneft deal violated their "right of first refusal" as stated in the JV agreement. The partners were successful in getting a court injunction in the United Kingdom to block the implementation of the JV in February 2011. TNK-BP at the time of this writing is considering a legal claim against BP for damages of up to $10 billion for allegedly reneging on its commitment to use TNK-BP as its main vehicle for investment in Russia. These developments raise serious questions about the longer-term viability of the BP-Rosneft JV.
:
Why would you expect the publicly traded Rosneft shares not to reflect the true value of the
firm?

Question 64

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 65

In general,business alliances are not intended to become permanent arrangements.All of the following are common reasons for terminating such arrangements except for

A) Diverging objectives of the partners
B) Successful operations resulting in merger of the partners
C) Completion of the project
D) Unexpectedly favorable financial performance
E) Antitrust considerations

Question 66

Termination provisions in alliances commonly include all but which of the following:

A) Buyout provisions enabling one party to purchase another's ownership interests
B) Predetermined prices at which the buyouts may take place
C) Breakup payments payable to the remaining partners
D) How assets and liabilities will be divided among the partners
E) What will happen to patents and licenses owned by the alliance

Question 67

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 68

Methods of dividing ownership and control in business alliances may take which of the following forms.

A) Majority-minority framework
B) Equal division of power framework
C) "Majority rules" framework
D) Multiple party framework
E) All of the above

Question 69

Business alliances typically use which of the following ways to finance ongoing capital requirements?

A) Request participants to make a capital contribution
B) Issuing additional equity or partnership interests
C) Borrowing without partner guarantees
D) A and B only
E) A, B, and C

Question 70

Autos R Us and Pre-owned Inc represent used car dealers that compete in the same city.These competitors each invest $15 million to form a new,jointly owned company,Real Value Inc,that will sell cars in a nearby city.The new firm is best described by which of the following terms:

A) Merger
B) Acquisition
C) Leveraged buyout
D) Joint venture
E) Consolidation

Question 71

JV and alliance agreements often limit how and to whom parties to the agreement can transfer their interests.These limitations include which of the following mechanisms?

A) Tag-along provisions
B) Drag-along provisions
C) Put provisions
D) A, B, and C
E) A and B only

Question 72

Which of the following is generally true about financing JVs and partnerships?

A) Lenders rarely require guarantees from the parents
B) Bank loans are commonly used to meet short-term cash requirements
C) Participants must agree on an appropriate financial structure for the organization
D) Contributions by the partners of intangible assets are usually easy to value
E) Corporations are an uncommon form of legal structure

Question 73

British Petroleum and Russia's Rosneft Swap Shares
Extending its already close ties with Russia, British Petroleum PLC announced an agreement to exchange shares with Russia's largest oil company, OAO Rosneft, on January 14, 2011. Rosneft is 75% owned by the Russian government. BP and Rosneft also announced the formation of a JV to develop three massive offshore exploration blocks that Rosneft owns in northern Russia. The two firms said they will jointly explore three areas in the South Kara Sea in the Russian Arctic, spending between $1.4 and $2 billion on seismic tests and drilling wells in the initial exploration phase. The JV will be two-thirds owned by Rosneft, with the remainder owned by BP.
Reflecting Europe's escalating dependence on Russia for an increasing share of its energy usage, particularly for clean-burning natural gas, the agreement is backed by Britain's prime minister, David Cameron, and Russia's prime minister, Vladimir Putin. Russia holds one-fifth of the world's proven reserves of natural gas, and, by some estimates, the South Kara Sea contains some of the largest reserves of oil and gas in the world.
The deal comes in the wake of BP's sale of assets to raise funds to cover the costs of the Gulf of Mexico oil spill in mid-2010. Such costs are expected to eventually total $40 billion. Rosneft, which had announced in late 2010 that it was seeking a partner for exploiting its Arctic leases, indicated that BP's experience in dealing with such problems gives it an edge over other potential partners. Rosneft also regards BP's deep-water drilling technology and experience as cutting edge. BP's expertise received another vote of confidence when Australia granted BP licenses to initiate extensive drilling activity off its coast several days after the Rosneft announcement.
The share exchange gives Rosneft a 5% interest in BP's voting shares, making it BP's single largest shareholder. In return, BP receives a 9.5% ownership stake in Rosneft. Each stake is valued at about $7.8 billion. Both firms agreed to hold each other's equity for at least two years before selling any stock. BP's shares currently pay a dividend about twice that of Rosneft's. BP and Rosneft have stated publicly that they believe investors have significantly undervalued their firms. The Russian government has a particularly strong interest in seeing the value of its holdings appreciate, since it announced plans to privatize a number of largely state-owned enterprises, including Rosneft, in 2014 in order to raise funds.
At the time of the announcement, BP's market capitalization was about $154 billion. With almost 90% of its shares owned by the Russian government and Sherbank, Russia's biggest retail savings bank, the firm's stock trading in public markets tends to be limited and not reflective of Rosneft's true value. However, the terms of the share exchange imply a market capitalization for Rosneft of about $81 billion.
The transaction represents the first time there has been a cross-shareholding between major international oil firms and a major government-owned national oil company. Unlike more conventional oil and gas JVs, the Rosneft JV will not own the oil leases but merely the right to develop them. This structure is similar to Russian oil company Gazrpom's agreement with France's Total SA and Norway's Statoil for the development of the Shtokman gas field in early 2008.
Rosneft became Russia's leading extraction and refining company after purchasing assets of former privately owned oil giant Yukos at state-sponsored auctions, in which the global community decried what appeared to be the Russian government expropriation of the privately owned assets. In 2006, Rosneft conducted one of the largest IPOs in history by issuing nearly 15% of its shares on the Russian Trading System and the London Stock Exchange. With the shares priced at $7.55 each, the offering raised about $10.7 billion. Most of the proceeds went to the Russian government. BP began its relationship with Rosneft by buying $1 billion in shares in the firm's initial public offering, equivalent to 1.3%. Thus, the recent agreement brings BP's ownership interest in Rosneft to 10.8%.
Previous attempts to invest in Russia and to create partnerships between Russian state oil companies and Western oil firms have failed due to outright expropriation by the Russian government or heavy-handed tactics employed by certain Russian billionaires (so-called oligarchs) with close ties to the Russian government. For example, Russian officials forced Shell Oil to sell control of its Sakhalin II oil and gas development to state-owned Gazprom. BP and Gazprom signed a global joint venture in 2007 in which each was to contribute assets valued at $1.5 billion, but it was later dissolved due to disagreements between BP and large Russian investors. TNK-BP, BP's 50 percent-owned JV with a group of Russian billionaire business people, has also had a troubled history. The JV that contributes a quarter of BP's global production and nearly a fifth of its reserves was rocked by a shareholder dispute in 2008 that cost BP some of its control. BP chief executive Bob Dudley had served as chief executive of that JV for five years until he was expelled by BP's Russian partners during the disagreement.
On news of the agreement, BP's partners in the TNK-BP JV stated that BP had not notified them adequately and that the Rosneft deal violated their "right of first refusal" as stated in the JV agreement. The partners were successful in getting a court injunction in the United Kingdom to block the implementation of the JV in February 2011. TNK-BP at the time of this writing is considering a legal claim against BP for damages of up to $10 billion for allegedly reneging on its commitment to use TNK-BP as its main vehicle for investment in Russia. These developments raise serious questions about the longer-term viability of the BP-Rosneft JV.
:
How would you estimate the market capitalization for Rosneft based on the terms of the share exchange? Show your work.

Question 74

British Petroleum and Russia's Rosneft Swap Shares
Extending its already close ties with Russia, British Petroleum PLC announced an agreement to exchange shares with Russia's largest oil company, OAO Rosneft, on January 14, 2011. Rosneft is 75% owned by the Russian government. BP and Rosneft also announced the formation of a JV to develop three massive offshore exploration blocks that Rosneft owns in northern Russia. The two firms said they will jointly explore three areas in the South Kara Sea in the Russian Arctic, spending between $1.4 and $2 billion on seismic tests and drilling wells in the initial exploration phase. The JV will be two-thirds owned by Rosneft, with the remainder owned by BP.
Reflecting Europe's escalating dependence on Russia for an increasing share of its energy usage, particularly for clean-burning natural gas, the agreement is backed by Britain's prime minister, David Cameron, and Russia's prime minister, Vladimir Putin. Russia holds one-fifth of the world's proven reserves of natural gas, and, by some estimates, the South Kara Sea contains some of the largest reserves of oil and gas in the world.
The deal comes in the wake of BP's sale of assets to raise funds to cover the costs of the Gulf of Mexico oil spill in mid-2010. Such costs are expected to eventually total $40 billion. Rosneft, which had announced in late 2010 that it was seeking a partner for exploiting its Arctic leases, indicated that BP's experience in dealing with such problems gives it an edge over other potential partners. Rosneft also regards BP's deep-water drilling technology and experience as cutting edge. BP's expertise received another vote of confidence when Australia granted BP licenses to initiate extensive drilling activity off its coast several days after the Rosneft announcement.
The share exchange gives Rosneft a 5% interest in BP's voting shares, making it BP's single largest shareholder. In return, BP receives a 9.5% ownership stake in Rosneft. Each stake is valued at about $7.8 billion. Both firms agreed to hold each other's equity for at least two years before selling any stock. BP's shares currently pay a dividend about twice that of Rosneft's. BP and Rosneft have stated publicly that they believe investors have significantly undervalued their firms. The Russian government has a particularly strong interest in seeing the value of its holdings appreciate, since it announced plans to privatize a number of largely state-owned enterprises, including Rosneft, in 2014 in order to raise funds.
At the time of the announcement, BP's market capitalization was about $154 billion. With almost 90% of its shares owned by the Russian government and Sherbank, Russia's biggest retail savings bank, the firm's stock trading in public markets tends to be limited and not reflective of Rosneft's true value. However, the terms of the share exchange imply a market capitalization for Rosneft of about $81 billion.
The transaction represents the first time there has been a cross-shareholding between major international oil firms and a major government-owned national oil company. Unlike more conventional oil and gas JVs, the Rosneft JV will not own the oil leases but merely the right to develop them. This structure is similar to Russian oil company Gazrpom's agreement with France's Total SA and Norway's Statoil for the development of the Shtokman gas field in early 2008.
Rosneft became Russia's leading extraction and refining company after purchasing assets of former privately owned oil giant Yukos at state-sponsored auctions, in which the global community decried what appeared to be the Russian government expropriation of the privately owned assets. In 2006, Rosneft conducted one of the largest IPOs in history by issuing nearly 15% of its shares on the Russian Trading System and the London Stock Exchange. With the shares priced at $7.55 each, the offering raised about $10.7 billion. Most of the proceeds went to the Russian government. BP began its relationship with Rosneft by buying $1 billion in shares in the firm's initial public offering, equivalent to 1.3%. Thus, the recent agreement brings BP's ownership interest in Rosneft to 10.8%.
Previous attempts to invest in Russia and to create partnerships between Russian state oil companies and Western oil firms have failed due to outright expropriation by the Russian government or heavy-handed tactics employed by certain Russian billionaires (so-called oligarchs) with close ties to the Russian government. For example, Russian officials forced Shell Oil to sell control of its Sakhalin II oil and gas development to state-owned Gazprom. BP and Gazprom signed a global joint venture in 2007 in which each was to contribute assets valued at $1.5 billion, but it was later dissolved due to disagreements between BP and large Russian investors. TNK-BP, BP's 50 percent-owned JV with a group of Russian billionaire business people, has also had a troubled history. The JV that contributes a quarter of BP's global production and nearly a fifth of its reserves was rocked by a shareholder dispute in 2008 that cost BP some of its control. BP chief executive Bob Dudley had served as chief executive of that JV for five years until he was expelled by BP's Russian partners during the disagreement.
On news of the agreement, BP's partners in the TNK-BP JV stated that BP had not notified them adequately and that the Rosneft deal violated their "right of first refusal" as stated in the JV agreement. The partners were successful in getting a court injunction in the United Kingdom to block the implementation of the JV in February 2011. TNK-BP at the time of this writing is considering a legal claim against BP for damages of up to $10 billion for allegedly reneging on its commitment to use TNK-BP as its main vehicle for investment in Russia. These developments raise serious questions about the longer-term viability of the BP-Rosneft JV.
:
Speculate as to the purpose of the share swap between BP and Resnoft.

Question 75

Which of the following is not a typical question that must be addressed in defining how ownership interests will be transferred?

A) What are the restrictions on transfer
B) How will new alliance participants be treated
C) Will there be a right of first refusal
D) How is the alliance to be managed
E) Will there by drag along, tag along, or put provisions

Question 76

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 77

If one party chooses to exit an alliance,the remaining party or parties often have the contractual right to

A) First offer their ownership interests to the other partners
B) Sell their ownership interests to the highest bidder
C) Put their interests to a third party that has no relationship to the alliance
D) Require that the other parties to the alliance buy them out
E) Dissolve the partnership

Question 78

Antitrust regulatory authorities tend to look most favorably on which type of alliances?

A) Equity partnerships
B) Marketing alliances among competitors
C) Global alliances
D) Project oriented ventures involving collaborative research
E) None of the above

Question 79

British Petroleum and Russia's Rosneft Swap Shares
Extending its already close ties with Russia, British Petroleum PLC announced an agreement to exchange shares with Russia's largest oil company, OAO Rosneft, on January 14, 2011. Rosneft is 75% owned by the Russian government. BP and Rosneft also announced the formation of a JV to develop three massive offshore exploration blocks that Rosneft owns in northern Russia. The two firms said they will jointly explore three areas in the South Kara Sea in the Russian Arctic, spending between $1.4 and $2 billion on seismic tests and drilling wells in the initial exploration phase. The JV will be two-thirds owned by Rosneft, with the remainder owned by BP.
Reflecting Europe's escalating dependence on Russia for an increasing share of its energy usage, particularly for clean-burning natural gas, the agreement is backed by Britain's prime minister, David Cameron, and Russia's prime minister, Vladimir Putin. Russia holds one-fifth of the world's proven reserves of natural gas, and, by some estimates, the South Kara Sea contains some of the largest reserves of oil and gas in the world.
The deal comes in the wake of BP's sale of assets to raise funds to cover the costs of the Gulf of Mexico oil spill in mid-2010. Such costs are expected to eventually total $40 billion. Rosneft, which had announced in late 2010 that it was seeking a partner for exploiting its Arctic leases, indicated that BP's experience in dealing with such problems gives it an edge over other potential partners. Rosneft also regards BP's deep-water drilling technology and experience as cutting edge. BP's expertise received another vote of confidence when Australia granted BP licenses to initiate extensive drilling activity off its coast several days after the Rosneft announcement.
The share exchange gives Rosneft a 5% interest in BP's voting shares, making it BP's single largest shareholder. In return, BP receives a 9.5% ownership stake in Rosneft. Each stake is valued at about $7.8 billion. Both firms agreed to hold each other's equity for at least two years before selling any stock. BP's shares currently pay a dividend about twice that of Rosneft's. BP and Rosneft have stated publicly that they believe investors have significantly undervalued their firms. The Russian government has a particularly strong interest in seeing the value of its holdings appreciate, since it announced plans to privatize a number of largely state-owned enterprises, including Rosneft, in 2014 in order to raise funds.
At the time of the announcement, BP's market capitalization was about $154 billion. With almost 90% of its shares owned by the Russian government and Sherbank, Russia's biggest retail savings bank, the firm's stock trading in public markets tends to be limited and not reflective of Rosneft's true value. However, the terms of the share exchange imply a market capitalization for Rosneft of about $81 billion.
The transaction represents the first time there has been a cross-shareholding between major international oil firms and a major government-owned national oil company. Unlike more conventional oil and gas JVs, the Rosneft JV will not own the oil leases but merely the right to develop them. This structure is similar to Russian oil company Gazrpom's agreement with France's Total SA and Norway's Statoil for the development of the Shtokman gas field in early 2008.
Rosneft became Russia's leading extraction and refining company after purchasing assets of former privately owned oil giant Yukos at state-sponsored auctions, in which the global community decried what appeared to be the Russian government expropriation of the privately owned assets. In 2006, Rosneft conducted one of the largest IPOs in history by issuing nearly 15% of its shares on the Russian Trading System and the London Stock Exchange. With the shares priced at $7.55 each, the offering raised about $10.7 billion. Most of the proceeds went to the Russian government. BP began its relationship with Rosneft by buying $1 billion in shares in the firm's initial public offering, equivalent to 1.3%. Thus, the recent agreement brings BP's ownership interest in Rosneft to 10.8%.
Previous attempts to invest in Russia and to create partnerships between Russian state oil companies and Western oil firms have failed due to outright expropriation by the Russian government or heavy-handed tactics employed by certain Russian billionaires (so-called oligarchs) with close ties to the Russian government. For example, Russian officials forced Shell Oil to sell control of its Sakhalin II oil and gas development to state-owned Gazprom. BP and Gazprom signed a global joint venture in 2007 in which each was to contribute assets valued at $1.5 billion, but it was later dissolved due to disagreements between BP and large Russian investors. TNK-BP, BP's 50 percent-owned JV with a group of Russian billionaire business people, has also had a troubled history. The JV that contributes a quarter of BP's global production and nearly a fifth of its reserves was rocked by a shareholder dispute in 2008 that cost BP some of its control. BP chief executive Bob Dudley had served as chief executive of that JV for five years until he was expelled by BP's Russian partners during the disagreement.
On news of the agreement, BP's partners in the TNK-BP JV stated that BP had not notified them adequately and that the Rosneft deal violated their "right of first refusal" as stated in the JV agreement. The partners were successful in getting a court injunction in the United Kingdom to block the implementation of the JV in February 2011. TNK-BP at the time of this writing is considering a legal claim against BP for damages of up to $10 billion for allegedly reneging on its commitment to use TNK-BP as its main vehicle for investment in Russia. These developments raise serious questions about the longer-term viability of the BP-Rosneft JV.
:
Would you expect the share exchange to be dilutive to BP shareholders in the short-run? In the long-run.Explain your answer.

Question 80

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