Sunny Li Sun

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BA 4371-004 International Business Class
11 International Alliances and MA

• Sunny Li Sun
• Nov. 8, 2008

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Obama's Victory Three Lessons for Business Leader

• A clear, consistent vision
• His message was simple and aspirational.
• Stick to a limited number of points, repeat them
  relentlessly, and turn people on.
• Clean execution
• Obama's team made few mistakes
• His advisers were best in class, and his players
  were always prepared, agile
• Outmaneuvering Hillary Clinton, who overlooked
  caucuses.
• You can't just beat your rivals by the old rules
  to grow, you have to invent a new game and beat
  them at that.
• Ally Friends in high places
• well-placed allies, good relationship with media
• Every time you try to usher in change, some
  people will resist. They may fight you openly in
  meetings.
• You need to start any leadership initiative with
  your "high-level friends" firmly by your side,
  convinced of the merits of your character and
  policies.

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ALLIANCES AND ACQUISITIONS
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Case Danone Wahaha --A Happy Marriage but
Painful Divorce
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Entry strategy of global giants

• Pepsi plans to spend 1 billion in China over
  the next four years, extending its investment in
  one of its fastest-growing markets as the
  troubled economy cuts into sales and profit in
  the U.S.
• Coke buy largest fruit-juice maker, Huiyuan, by
  2.4B in Sept., 2008
• Danone Alliance with Bright, Mengniu, Wahaha,
  Acquire Robust.

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Background Groupe Danone SA

• In 1966, BSN was founded, French glass and
• packaging manufacturer.
• In 1973, enter food industry, acquisition of
  Kronenbourg.
• In the 1980s, a string of acquisitions in the
  European food market.
• In 1990s,renamed Danone, focus on fresh dairy
  products, biscuits and waters. About 50
  acquisitions throughout the world.
• 2007 July, Danone sold its cookies and cereals
  business to Kraft Foods Inc. for 5.3 billion
  euros. That deal, from which they posted a 3.1
  billion euros gain.
• 2007 net income soared 309, from 1.4 billion
  euros (2 billion) in 2006 to 4.2 billion euros.
• 2007 July, Danone bought Dutch nutrition and baby
  food maker Royal Numico NV for about 12.3 billion
  euros.

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Background Knowledge

• Wahaha is one of the best known domestic beverage
  brands in China.
• Started by a school teacher selling soft drinks
  in the high school.
• 1987, company founded.
• 1994, 40 subsidiaries.
• 1997, 100M Sales .

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Timeline

• In 1996, the first JV was formed. Danone owned
  51(invest 170 million), Wahaha brand be valued
  13M, and injected into master JV.
• Five subsidiaries formed in 1996.
• By 2006, 39 subsidiaries of JV in China, sales
  2.25B.(Contribute 6 of Danones global
• profits),
• pay dividends 307M over the decade
• Trademark

Translation for the Chinese in the picture You
are mine I am yours.
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Other Moves by Danone

• Invest another 170 million on other leading
  Chinese food and dairy companies (e.g., Bright).
• Acquire China Robust, the country's biggest
  producers of bottled water and dairy-based
  drinks, sales of 175m in 1998.
• Danone gained 23 of China's bottled-water market
  in 2006.

• Invest another 170 million on other leading
  Chinese food and dairy companies (e.g., Bright).
• Acquire China Robust, the country's biggest
  producers of bottled water and dairy-based
  drinks, sales of 175m in 1998.
• Danone gained 23 of China's bottled-water market
  in 2006.

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Other Moves by Wahaha

• In 2002, enter children clothes industry.
• By 2006, 31 other subsidiary companies and 40
  manufacturing bases

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Conflicts

• In 2006, the profit of JVs between Danone and
  Wahaha increased by 48(386 million).
• Danone offered 500 million to acquire Wahahas
  other subsidiaries to buy out the Wahaha Brand.
• Rejected by Wahaha. (Book value 700 million
  with total profits of 130 million)
• Dispute on the brand name.

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Conflicts continue

• Original master JV agreement on trademark
  exclusive rights was never approved by the
  Chinese trademark office.
• Competitions between Danone and Wahaha through
  their other JVs and subsidiaries.
• In 2007, lawsuits in China, Sweden, and the
  United States.

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Conflicts continue Negotiation

• In 2007, both Chinese and French government urged
  both company to reach an agreement.
• If we now have 30 of our sales in emerging
  markets and we built this in only 10 years, it's
  thanks to this specific JV tactic. We have
  problems with Wahaha. But we prefer to have
  problems with Wahaha now to not having had Wahaha
  at all for the last 10 years.
• ---- Danone spokesman
• 2007, Dec. 21, Danone and partner Hangzhou Wahaha
  Group decided to resolve trademark disputes and
  jointly announced that they would "temporarily
  suspend all lawsuits and arbitrations, stop all
  aggressive and hostile statements and create a
  friendly environment for peace talks." Issue
• percentage of ownership
• Price of Buyout
• The non-JV subsidiaries.

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Conflicts continue to 2009!

• 2008, Danone has engaged itself in numerous
  lawsuits against Wahaha of which it has suffered
  12 defeats.
• July 30, 2008, The Hangzhou Intermediate People's
  Court turned down Danone's appeal against Chinese
  arbitration commission's decision to back
  Hangzhou Wahaha Group's trademark right. Danone
  SA that it would appeal to higher authorities.
• July 11, 2008, the Arbitration Institute of the
  Stockholm Chamber of Commerce (AISCC) issued the
  7th procedure order, on the case of Danone's
  application for temporary measures. AISCC
  rejected Danone's request of taking temporary
  measures on Wahaha. A court in Stockholm, Sweden
  will hear the case next January.

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Lesson from Danone in EE

• Danone has adopted a strategy of growth through
  joint ventures, particularly in fast-growing
  emerging markets, because it lacked the
  management depth and size to grow quickly. In its
  markets, Danone has built an attractive portfolio
  in emerging markets over the past 10 years which
  represents 30 of its sales.
• Danone has continued to pursue this strategy, and
  has joint ventures with companies such as Al Safi
  in Saudi Arabia (2001), Yakult in India (2005)
  and Vietnam (2006), Alquería in Colombia (2007),
  and Mengniu in China (2006).
• Danone has been having problems with some of its
  other joint ventures, notably its joint venture
  with Britannia Biscuits in India (1995), which
  have been in high-profile disputes since 2006
  respectively.
• Mengnius deal is canceled in 2007.
• Sell 5 Huiyuan equity to Coke in Sept. 2008,
  waiting for Anti-trust law investigation by China
  government.

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ALLIANCES AND ACQUISITIONS

• Equity-based alliances - strategic investment
  one partner invests in another
• Cross-shareholding - both partners invest in each
  other
• Acquisitions - transfer of the control of
  operations and management from one firm (target)
  to another (acquirer), the former becoming a unit
  of the latter
• Merger - combination of operations and management
  of two firms to establish a new legal entity

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Institutions, Alliances, and Acquisitions

• Formal institutions set of formal legal and
  regulatory frameworks impacting
• (1) antitrust concerns
• (2) entry mode requirements

• Danone initiated plans to independently invest in
  an Indian dairy subsidiary. In May 2007, Nusli
  Wadia told the Ministry of Commerce and Industry
  that Danone invested in Avesthagen, a
  Bangalore-based bio nutrition company, in October
  2006 in violation of the government's Press Note
  1, 2005, which requires a foreign company to
  obtain the consent of its Indian joint venture
  partner before pursuing an independent business
  in a similar area, including joint ventures based
  purely on technical collaboration.
• In September 2007, the Foreign Investment
  Promotion Board of India rejected Danone's claims
  that it does not need a non-compete waiver from
  the Wadias in order to enter into business in
  India alone.
• Informal institutions - imitation drives many
  alliance/acquisition decisions yet some firms
  rush into alliances and acquisitions without
  adequate due diligence and then get burned.

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RESOURCES AND ALLIANCESVRIO Framework

• Value alliances - must create value by reducing
  costs, risks, and uncertainties
• real option - investment in real operations as
  opposed to financial capital
• learning race - competitive situation in which
  partners aim to outrun each other by learning the
  tricks from the other side as fast as possible
• acquisition premium - difference between the
  acquisition price and the market value of target
  firms

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From discounted cash flow (DCF) to
Black/Scholes/Merton (BSM) equation

• Danone and Bright set up a 50-50 yoghurt joint
  venture in 1992. Danone licensed Bright Dairy to
  produce and market products inside China using
  Danone brands. The joint venture underwent a
  stake diversification reshuffle and went public
  in 2000
• In 2001, Danone acquired a 5 stake in Bright
  Dairy, and later doubled its shareholding in
  March 2005, and again, to 20, in April 2006,
  becoming the third largest shareholder after
  Shanghai Milk Group and S.I. Food, each holding
  25.17.
• Danone divest its stake by selling ownership in
  2007 in 140M, and pay 55M to terminate the
  existing distribution and production agreement in
  2007.

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RESOURCES AND ALLIANCESVRIO Framework

• Rarity - ability to successfully manage interfirm
  relationshipsoften called relational (or
  collaborative) capabilities may be rare
• relational (or collaborative) capabilities
• relationships that occur within an organization
  firms must have unique skills to execute strategy
• "TRUST" is an international business game
  organised by Groupe Danone and its subsidiaries.
  The business game is a way to for Danone to
  identify and recruit possible future employees,
  that fit the companies values and way of doing
  business and furthermore enables Danone to
  improve its employer image.

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RESOURCES AND ALLIANCESVRIO framework

• Imitability - one firms resources and
  capabilities may be imitated by partners
• trust and understanding
• firms without good chemistry may have a hard
  time imitating such activities
• - firms that excel in integration possess
  hard-to-imitate capabilities

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RESOURCES AND ALLIANCES VRIO framework

• Organization - alliance relationships are
  organized in a way that makes it difficult for
  others to replicate
• whether acquisitions add value boils down to how
  merged firms are organized to take advantage of
  the benefits while minimizing costs.
• Danone Business Game Trust
• Students participating in the game have to deal
  with different aspects of the business life
  whilst running a strategy of a fictive Danone
  company, on both business and sustainable
  development aspects. Problem solving skills,
  analytical skills and resourcefulness are all put
  to test.

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ALLIANCES AND ACQUISITIONS

• How do firms choose between alliances and
  acquisitions?
• alliances
• create value primarily by combining complementary
  resources
• as real options, may be more suitable under high
  levels of uncertainty
• acquisitions
• derive most value by eliminating redundant
  resources
• preferable when the level of uncertainty is low

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• To Cooperate or Not to Cooperate?
• Contract or Equity?
• Specifying the Relationship

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COMBATING OPPORTUNISM

• It is difficult to completely eliminate
  opportunism, but it is possible to minimize its
  threat by
• walling off critical capabilities
• swapping critical capabilities through credible
  commitments
• Sometimes none of these approaches work, and the
  relationship deteriorates

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PERFORMANCE OF ALLIANCES
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MOTIVES FOR ACQUISITIONS
'I'm feeling absolutely marvelous. I think I'll
acquire another company.'
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PERFORMANCE OF ACQUISITIONS

• Why do as many as 70 of acquisitions fail?
• Pre-acquisition

• executive hubris and/or managerial motives
• inadequate screening and failure to achieve
  strategic fit
• 80 of acquiring firms do not analyze
  organizational fit
• failure to address multiple stakeholders
  concerns regarding job losses and diminished
  power

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PERFORMANCE OF ACQUISITIONS
Why do as many as 70 of acquisitions
fail? Postacquisition

• integration problems
• strategic fit
• organizational fit resulting in inadequate
  attention to people issues, resulting in low
  morale and high turnover
• clashes of national cultures

'The take-over seems to be going smoothly
enough.'
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MAs Alliances

• Given the high rates of MA failures, it seems
  imperative that firms seriously and thoroughly
  investigate alliances as an alternative before
  embarking on acquisitions.

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Summary

• A clear, consistent vision
• Clean execution
• The formation, evolution,
• and performance of alliances
• The motives and
• performance of acquisitions
• Next Week
• Multinational Strategies, Structure and Learning
• Integrative Cases Presents and Discussion 3

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