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Archives: Alliances

Hollywood Rejects Top Offer

As the bidding war for Hollywood Video continues between competitors Blockbuster and Movie Gallery, Hollywood’s board is encouraging its shareholders to reject the highest offer, the $14.50 in stock and cash from Blockbuster.

According to The Portland Business Journal, Blockbuster Inc. said that it will pay $1,146.24 cash for each $1,000 worth of Hollywood Entertainment Corp.'s 9.625 percent senior subordinated notes due in 2011. If this bid is successful Blockbuster will hold almost two-thirds of Hollywood's $350 million in debt. However, earlier this month Hollywood's board told its shareholders to reject Blockbuster’s bid while it endorsed that of Movie Gallery’s, $13.25 per share. Although a lower offer Blockbuster’s board fears that a purchase by Blockbuster will be blocked by the FTC for a violation of antitrust laws.

Canadian-Chinese 3G Alliance

The Canadian telecommunications company, Nortel Networks, is forming an alliance with the Beijing-based China Putian Corporation to develop and product third generation (3G) mobile phone technology.

 

According to China View, the new company, to be called Putian-Nortel Networks Telecommunications Equipment Co., will focus on TD-SCDMA and WCDMA, which are both third generation communications standards for mobile telecommunication.

This alliance marks the first step for these two companies to try to bring Chinese 3G technology to the international market.

Virgin Seeks Ally in China

Earlier today IBM announced the sale of its PC division to the Chinese PC maker, Lenovo Group Ltd. Lenovo is China’s biggest computer maker and hopes to use the IBM brand to bolster its recently weak performance. However, this was not the only company that announced its intention of creating an Anglo-Sino alliance to take advantage of developing Chinese technology.   

 

According to the Guardian, Virgin Group announced today that it is in negotiations with several Chinese telecoms to form a joint venture in order to set up a network in China. The proposed deal would create an independent entity half owned by Virgin at a cost of around $300 million.

The group’s famed chairman, Richard Branson, states that this is a long term project which could take up to 12-18 months for it to even launch. This anticipated launch date is conveniently near the time when the Chinese government is expected to announce the number of licenses it will issue for third generation mobile service.

Competition for Hollywood

On the heels of Blockbuster's offer to acquire Hollywood Entertainment Corp., Movie Gallery has announced its intentions to pursue the video rental company. Movie Gallery claims that its proposal is “superior” to that of Blockbuster and argues that unlike an attempted merger with Blockbuster, a deal with them would be possible.

 

In making its bid, Movie Gallery told Hollywood that their deal with Blockbuster would be in violation of antitrust laws. According to the Wall Street Journal, Movie Gallery believes that because 85% of the Hollywood stores in urban markets are within 5 miles of a Blockbuster store, antitrust regulators would not approve the deal.  However, Blockbuster claims that the deal would survive antitrust scrutiny because the combined company would only have a 20% share of the home video market when including mass and internet retailers.

Since Movie Gallery is only one-third the size of Blockbuster, to match Blockbuster's offer Movie Gallery would have to take debt of more than 5.5 times its earnings before interest, taxes, depreciation, and amortization.

The market reacted with little enthusiasm for the deal on Friday with Hollywood shares increasing 7.3% but both Movie Gallery and Blockbuster falling.

Sears - Kmart Merger

In a surprise strategic move to save the troubled retailers Sears and Kmart announced their merger this morning.  This new company, to be called Sears Holdings Corp., will be formed in deal valued at over $11 billion will create the third largest retailer with $55 billion in annual revenue and 2,350 full-line and off-mall stores, and 1,100 specialty retail stores.

EC v. Microsoft...Again

In another show of concern for Microsoft the European Commission has sent a “statement of objection” to the software giant, along with Time Warner and ContentGuard, regarding the former two’s joint takeover of the latter. 

The Business Standard reports that the reason for the EC’s worries is that it fears a takeover by Microsoft and Time Warner of ContentGuard would increase Microsoft’s dominance in the market for digital-rights management.  This deal would give Microsoft control over key technologies in the digital media market.  This technology is important to the development of digital entertainment because it “controls the way consumers use online music and films.”

While the Commission's concern does not necessarily mean that it will block the deal, The Register reports that a final decision is due in January. 

In a related note the European Commission has decided it will pursue its antitrust case against Microsoft despite its recent settlement with Novell.

Harvard Negotiating 102, "Getting Past Yes"

Negotiating is an art that many engage in but at which few people excel. In the context of alliances, negotiations play an essential role, if not the essential role, of any deal. Negotiations create alliances and residual effects of negotiations destroy alliances. The problem is that the negotiators themselves often lead to the demise of the alliance in the long run, even if they are successful in the short term.

According to an article in the November issue of the Harvard Business Review entitled, “Getting Past Yes,” by Danny Ertel, deal makers often negotiate with the wrong goal in mind, getting the contract signed, as opposed to solidifying terms that will benefit the parties in the long run. In fact, companies often compensate based on the size of the deal that gets signed, and the well known negotiations books teach that “closing” is the final destination. Ertel argues that the techniques that are used in this approach have a direct relation to the ultimate failure of the deal, after the closing..

The negotiators whose goal is to get the contract signed behave differently in negotiations than those who see the agreement as the beginning of a long relationship, the goal of which is to create value. Ertel believes that these contrasting approaches have different opinions on such matters as the use of surprise and the sharing of information. These two camps “also differ in how much attention they pay to whether the parties’ commitments are realistic, whether their stakeholders are sufficiently aligned, and whether those who must implement the deal can establish a suitable working relationship with one another.”

In addition to these underlying problems, companies often bring in “hired guns” to ensure the deal is closed with the fewest concessions. The people who are then placed to implement the new terms of the alliance have no contact with the “hired guns” and don’t know why such structure exists. Finally, these “hired guns” can create animosity between the parties as efficiently as they can close the deal, and this feeling lasts long after the contracts are signed.

The article then lists five methods that if adapted, could affect the success of alliances.

1. Start with the end in mind; look down the road a year into the deal and anticipate its success by looking at what terms need to be in place to accomplish stated objectives.

2. Help them prepare, too; when looking to be successful at implementation it is important to make sure the other side is as well prepared as you are during negotiations, as opposed to trying to gain an advantage through surprise.

3. Treat alignment as a shared responsibility; don’t rely on secrecy to achieve your goals, think about informing internal stakeholders of your interests and objectives so that they can provide you with suggestions to improve the outcome. Acceptance of the deal by the people who are necessary for its implementation is essential. While it is also necessary to withhold information from some people, “suitable proxies should be identified to ensure that their perspectives (and the roles they will play during implementation) are considered at the table.”

4. Send one message; the team that negotiated the terms of the contract need to inform all the people involved in its implementation the reasons why it is structured as it is so that this implementation team can start off on the same page.

5. Manage negotiation like a business process; consider the costs and challenges of executing the deal terms, rather than simply focusing on getting the other side to say yes.

This article is also good in that it illustrates the results of a number of companies that have used these different approaches to negotiations. Despite the hard work and potential additional costs of this style of negotiation the author leaves you with this thought; “the most expensive deal is the one that fails.”

Joint Venture to Bring Broadband to 16M in Argentina

WebSky Inc. announced that it is forming a joint venture with a local telecommunications company to develop a wireless broadband internet system for Buenos Aires. This is a major product for Websky considering the service area to be covered by the agreement has a population of over 16 million.

A report issued by the United Nations in September stated that there were 110,000 broadband subcribers in all of Argentina at the end of 2003, though most were within the service area covered by the agreement. According to local observers this figure had increased to 155,000 in July. Yet despite this increase, only 10% of all internet subscribers use broadband.

WebSky Inc. is a San Fracisco based company that controls licensed radio frequencies in seven U.S. cities. In addition to the joint venture in Buenos Aires, Websky has entered preliminary joint venture agreements with companies in India, Thailand, and Indonesia.

This information was taken from Business Wire.

Legal Woes May Not Disrupt Creation of World’s Largest Banking Group

The complex game of mergers and acquisitions has become even more complicated by lawsuits as Mitsubishi Tokyo Financial Group Inc. attempts to merge with UFJ Holdings Inc. However, an injunction filed by Sumitomo Trust & Banking Co. Ltd. may not be able to stop the deal.

According to Martin Foster’s article, "Sumitomo Trust Weighs Legal Move" in The Daily Deal, Sumitomo Trust & Banking Co. is considering filing a formal injunction against the merger after their agreement to buy UFJ’s trust bank for $2.75 billion broke apart two months ago. Japan’s supreme court overturned a provisional injunction against the merger but “left the door open” for continued litigation when it ruled that the negotiating rights between Sumitomo Trust and UJF Holdings were binding.

A spokesman for Sumitomo Trust stated that legal action “will eventually happen.”

However, the Nihon Keizai Shimbun newspaper reported that if Sumitomo Trust does decide to pursue further legal action, a decision on the matter may take more than a year and would therefore come too late to prevent the merger, which is planned for October 2005.

Molson/Coors Merger in Doubt?

The Federal Trade Commission approved the merger today of Canada’s largest brewer and the U.S.’s third largest brewer. However, the deal between Adolph Coors Co. and Molson Inc. may still have a ways to go before it becomes a reality.

According to Forbes, the new entity, to be called Molson Coors Brewing Co., would become North America’s largest brewer surpassing Anheuser-Busch and SAB Miller with a total of $6 billion in revenues.

Although the FTC decision today paves the way for the merger, there is still another hurdle that needs to be overcome. The deal proposal now has to goes to the companies' shareholders for approval, which may not be an easy task.

According to Bloomberg, the merger requires approval of 2/3 of the stockholders of Molson’s class A shares. In an effort to aid its chances of being approved, Molson's management has proposed a plan to allow holders of options for their class A shares to vote on the deal. This plan is being staunchly opposed by almost 10% of class A stockholders.

On another bad note, if stock performance is any guide to the future success of a merger, which it often is, this merger is in trouble. Since the merger announcement in July, Coors’ shares have fallen 10% while Molson’s have fallen by 9%.

Internal Conflicts: The VC/Entrepreneur Alliance

Increasing friction between venture capitalists (VC’s) and entrepreneurs has been highlighted by recent lawsuits which call into question the loyalty of company board members.

In an article entitled “Hostile Environment” found in yesterdays issue of the Daily Deal, securities litigator Kimberly Greer writes about a growing trend of backlash by entrepreneurs against VC firms that claim the VC’s are breaking their fiduciary duties to the company.

Venture capitalists have been a long time friend of entrepreneurs who desperately need start-up capital to open shop. While the capital is of great benefit to the principals, there are drawbacks.

In exchange for this capital, entrepreneurs are not only forced to give the VC’s a cut of the profits but significant contol over the operations of the company. To insure the company operates as anticipated, VC’s appoint representatives to the company’s board, and this is where the trouble starts.

As members of the board these representatives legally owe fiduciary duties to the company. Included in these duties are the duties of loyalty, due care, “good faith and of acting in the best interest of the corporation and its shareholders.” According to Greer, these fiduciary duties sometimes conflict with the duties they owe to their employers, the VC firms.

Greer illustrates this clash of interests by giving an example of one Silicon Valley entrepreneur’s fight against a VC firm. Aamer Latif, founder of the former Nishan Systems Inc., filed a lawsuit in 2003 against a number of parties including Nishan’s two VC’s and the VC’s board of director designees. Latif alleges, among other things, that there was a breach of fiduciary duties surrounding a non-disclosure of conflicts of interest and the sale of Nishan in which the VC’s received almost $60 million while the common stockholders received $4 million.

While fiduciary duties set forth the fact that the directors who represent VC interests must protect the interests of the whole company, the majority and minority stockholders, there are other rules that govern their actions as well. For example;

- when a company enters into a transaction with a VC related entity it is a conflict of interest for a VC appointed board member to vote on that transaction;

- VC’s must obtain disinterested board approval

- VC’s must allow other qualified stockholders to participate in financing; and

- VC’s must seek input from disinterested financial and legal advisors.

As long as VC’s follow these, and other, rules there should be less scrutiny in transactions, based on the business judgment rule.

Therefore, while the use of VC’s may force the founders and other shareholders to give up major control, there are restrictions on the use of this control. In todays business environment VC’s and entrepreneurs both play an essential role in the growth of our economy. The potential for conflicts should not be a deterrent to forming this alliance but simply a reminder to both sides that this relationship may not be easy.

French-Pakistani Alliance

On Friday the Pakistan France Business Alliance (PFBA) and the French Ministry of Economy, Finance, and Industry (MINEFI) signed a cooperative agreement to promote economic cooperation between the two countries.

According to PakistanLink, this agreement will strengthen ties between the two countries' private sectors by actively promoting trade and investment opportunities. Through trade shows, an exchange of distinguished speakers, and the highlighting of import/export opportunities on the internet, the countries believe this alliance will be able to improve the image of Pakistan and encourage French companies to do business there.

Yahoo Enters Music Market

In a long anticipated move, Yahoo finally entered the online music market by buying Musicmatch for 160 million in cash on Tuesday.

According to the Financial Times Musicmatch is best known for its “jukebox software.” This software allows Musicmatch’s 60 million users to download, organize, and play music on their personal computers. This acquisition will combine Yahoo's streaming audio and video with Musicmatch's music library of over 700,000 songs. Mismatch currently sells these songs for 99 cents each, the same price as its rival iTunes.

Yahoo’s entry comes at a time when competition in the online music industry is starting to increase. Currently iTunes, which is owned by Apple, holds 70% of the market, but other competitors such as Microsoft, Wal-Mart, and Sony have been in hot pursuit.

Oracle Acquisition May Face Further Antitrust Hurdles

Despite Wall Street’s positive reaction that sent software stocks up yesterday, Judge Walker’s ruling to allow Oracle's acquisition of PeopleSoft may not clear the way for more consolidation in the industry.

According to the Miami Herald, software stock prices climbed yesterday in anticipation of a merger wave that now may be possible due to the ruling in the Justice Department’s antitrust suit against Oracle.

The San Francisco court rejected the DOJ’s arguments that the acquisition of PeopleSoft by Oracle would so reduce the competition in the software industry that the remaining companies would have no incentive to innovate or compete on price. Walker stated that this scenario set out by the DOJ was unlikely to occur since the “software industry involves numerous players and is highly competitive,” reported the Washington Post. However, the acquisition still faces another antitrust challenge, approval by the European Union.

The blocking of the GE/Honeywell deal by the EU showed the world that the European Commission was an independent examiner willing to disagree with the DOJ and block mergers by two U.S. companies. The EC has already shown signs of its disapproval when in April the Commission sent Oracle a list of objections to the merger. However, some analysts believe that the EC will approve the merger because the total market share of Oracle/PeopleSoft would still be less than that of SAP AG of Germany. Mario Monti is expected to rule on this issue before he steps down in November.

Coke Submits Settlement Plan to EU

According to Reuters, Coke submitted a settlement plan to the European Commission in an effort to end the ongoing antitust case against them by the EU.

Apparently the plan is a good effort to address the concerns of the EU customers and competitors. In Europe, Coke has a much greater market share than it does in the U.S. Bloomberg further stated that Coke is offering to counter the charges by the European Commission of discriminating against its rivals by changing its sales practices.

New SEC Rules on Deal Reporting

On August 23 new rules developed by the SEC regarding the "real-time issuer disclosure" of section 409 of the Sarbanes-Oxley act came into effect.

In an article entitled "New Rules Speed Up the Reporting of Deals: Swifter and More-Detailed 8-K Filings Address the Real-Time Disclosure Obligations Outlined in Sabanes-Oxley" in Mergers and Acquisitions Journal on September 1, 2004, John C. Partigan outlines and comments on the changes in the reporting requirements of 8-K filings.

Form 8-K is used by firms to report material events that have not been previously reported in any company report. These new rules increase the scope of events that must be reported and decrease the amount of time a company has to file the form, to four days after a “triggering event." As a result of these rules companies doing M&A transactions must now follow stricter requirements, however according to Partigan, determining the applicability of these requirements may pose difficulty for companies.

Some of the changes in the rules are as follows:

New item 1.01 of form 8-K requires that companies disclose any “material definitive agreement,” which includes agreements relating to mergers, acquisitions, or divestitures. However, due to a lack of SEC guidance, securities lawyers have to speculate whether a signed agreement that has yet to face board approval is reportable under item 1.01. If interpretation of this rule is that it is reportable, companies may have to gain board approval before signing any agreement, or within the four day reporting period, so that the board is not put in a position where it has to vote on the transaction after it has been publicly announced on the 8-K.

Letters of intent under these guidelines are usually not reportable. The Adopting Release states that a non-binding letter of intent, or one that has some binding provisions (such as no-shop agreements or confidentiality agreements), are non-material elements and need not be reported. However, Partigan continues, a duty to disclose merger negotiations or a non-binding agreement could arise, “for example, if the company were repurchasing its own securities in the market or where there were market rumors or leaks about the deal which could be attributed to the company.”

Upon entering into a material definitive agreement item 1.01 requires the company to disclose the following information;

- the date on which the agreement was entered into or amended

- the identity of the parties to the agreement and a brief description of any material relationship between the company or its affiliates and any of the parties

- a brief description of the terms and condition of the agreement or amendment that are material to the company

Partigan further recommends that consideration be given “to describing the termination provisions, including the stated termination date any material breakup fees, in the initial 8-K for the deal since, if the agreement were to be terminated before closing, those provisions may need to be described in a second 8-K relating to termination.”

The 8-K is also subject to anti-fraud claims under Section 10(b), Rule 10b-5 and Rule 12b-20 of the Exchange Act, and therefore in addition to the required disclosure, a company has a duty to clarify statements made in the 8-K with further material information. The SEC adopted a limited safe harbor provision that protects a company from failing to meet the filing deadline under items 1.01 and 1.02, but this provision does not protect the company against actions based on the contents of the 8-K.

Item 1.02 requires disclosure upon the termination of a material definitive agreement relating to an M&A transaction if the termination is material to the company. This disclosure is not required if the termination is the result of completed obligations under the agreement or the expiration of the agreement on a stated termination date.

Finally, the SEC noted in the Adopting Release that the filing of the 8-K may constitute the first ‘public announcement’ for purposes of rule 165 under the Securities Act and rule 14d-2(b) or rule 14a-12 under the Exchange Act , and trigger a filing obligation under those rules. The SEC amended the 8-K to allow the company to indicate its satisfaction of these simultaneous filing obligations to avoid duplication.

Post merger success for Air France - KLM

Despite a rise in oil prices, the airline industry’s leading revenue generator, Air France – KLM, said increased passenger traffic and the realization of post-merger synergies attributed to a doubling of its first-quarter profit to 95 million euros ($115.8 million), as reported in the Wall Street Journal on September 3 in “Air France-KLM Net Profit Surged in Quarter.”

This marks the first time the two airlines released combined quarterly earnings since their merger in May. Cnn.com further stated that these earnings topped analysts predictions which were set at 90 million euros. Of the 95 million in earnings, 34 million is attributed to a writeback of negative goodwill from the deal.

The EU's New Trustbuster

When Mario Monti leaves his position as EU merger regulator in November he may be leaving behind an era of obstructionism. Monti's successor, Neelie Kroes, also known as "Nickel Neelie" because she is as tough as metal, may not be as tough on merging corporations.

Despite her nickname financial experts predict that Kroes will be softer on business than Monti. Unlike Monti, who was an academic, Kroes has an extensive business background and is unlikely to the continue the anti-business crusades of her predecessor, reports the Seattle Times.

Although Kroes is considered to be tough and "is not the type of person to blink," she is a wealthy businesswoman who serves on executive boards of dozens of companies. The Wall Street Journal reported on August 13th in "Kroes's Appointment May Help Mend U.S. Ties," that her business background will make it unlikely that she will follow Monti's complicated economic theories that have blocked deals and upset US officials.

Daimler: Mitsubishi Projects Not in Peril

In a statement in Reuters, DaimlerChysler insisted that despite its refusal this year to help bailout its Japanese partner Mitsubishi, the companies’ joint venture projects would continue.

This report dismisses a claim in a Japanese news article that reported Mitsubishi as trying to loosen the alliance with Daimler. “Mitsubishi remains one of our strategic partners in Asia, and all alliance projects that make economic sense for both partners will continue," said the Daimler spokesman. "They are also secured through long-term contracts."

The two companies have allied to make use of common platforms for their medium-size sedans and have discussed a 50/50 joint venture to produce a car in the Netherlands. Mitsubishi has had a tough financial year with sales down and balance sheet ridden with debt and is still trying to recover from a corporate scandal in 2000 involving hidden customer complaints which greatly hurt its brand loyalty.

In addition to its use of contractual agreements to secure the alliance, Daimler has a 20% stake in Mitsubishi which dropped from 37% after Mitsubishi’s recent share issuance.

When to Ally & When to Acquire

A problem that has been plaguing the business world for years is claimed to have been solved by the folks at Harvard according to the July/August 2004 isse of Harvard Business Review. While acquisitions and alliances are picking up pace after the recession, 8,383 acquisitions and 5,789 alliances in 2003, growing companies should be aware of the problem: the fact that many collaborative efforts fail. According to the Journal of Finance acquiring firms experience a wealth loss of 10% over the first five years after a merger completion, while a Harvard study of 1,592 alliances found that 48% fail within the first two years.

The strategic reason for collaboration being the creation of synergies, the Harvard crew believes that it has developed a framework that will increase collaborative success based on the analysis of the resources and synergies desired, the marketplace firms compete in, and a firm's experience in past collaboration.

There are three types of synergies that are created in these collaborative efforts and the type desired should dictate the strategy. Of these three types of synergies only one involves the combining and customizing of the two firm's resources to make them reciprocally interdependent, this is usually best accomplished through acquisition. Synergies where firms maintain independent resources usually are best managed in an alliance structure.

In addition, the article continues, when a firm is looking to combine resources they should analyze the type of resources to see whether they are hard, physical assets, or soft, like people. The former situation is often better for an acquisition since physical resources are easy to value and often generate value quickly whereas the latter are often unreliable. In many instances people in the acquired firm leave during the integration process or simply become unmotivated and destroy any value.

Besides simply focusing on internal synergies that will be created, firms must also weigh market factors such as uncertainty of the target business and the importance of keeping a target firm's resources out of the hands of its competitors.

While it is often a good strategy for companies to stick with what they are good at, that strategy can prevent companies from seeing the benefits of the other form of collaboration. Therefore, while it may be difficult, the ultimate goal of growing companies should be to learn how to handle both. HBR advises growing firms to model their transaction strategy after the one developed at Cisco, who has a solid strategy and a proven track record in this area.

When purusing an alliance that has potential to mature into a full acquisition HBR urges that the larger firm consider creating an equity relationship in addition to a contractual one. Forming an equity stake in the smaller firm can help to build trust between the companies which is essential for a long term relationship. An equity stake in the potential acquisition also allows the potential acquirer the ability to pre-empt rivals when the time arrives for the acquisition.