Manufacturers Trend away from M&A, toward Strategic Alliances

Manufacturers are beset with competition across multiple fronts. They need to launch new products quickly, reduce prices, and/or serve the needs of the customer better. They need to make headway, if not on all of these things, then at least on one of the above, every day. They are always looking at Operations, supply chain, infrastructure, and accounting for opportunities to scrimp, save, and go above-and-beyond, but there is one area that many companies overlook.

The information that represents company activities, and the Intellectual Property (IP) licensing opportunities this information provides, can hold much more value (and risk) than manufacturers are aware. In fact, IP is value-less until it is protected with IP rights, meaning that simply by identifying trade secrets and protecting them adds real value. But beyond this initial stage, an entity can dole out licenses to buyers, suppliers, or partners in exchange for other valuables. This is fundamentally how IP delivers value.

Advanced agreements can accelerate growth, increase operational agility, mitigate risk, and increase the value of deals with buyers, all of which can help an organization become more competitive. The transformation of high tech over the last two decades, in which successful hardware manufacturers have become primarily services-driven, exemplifies the power of M&A. But in 2017, Toshiba is only one example in a slew of spinoffs, proving how acquisition can be too rigid in a volatile world. Instead, smaller, B2B groups organized around advanced agreements will be the most stable structure. 

Partner Up: Joint Ventures on the Rise in Popularity and Returns

Joint ventures are a critical data point in the IP story. As multinationals encounter resistance and risk overseas, as organizations cannot risk M&A activity but need the benefits of partnership, as the cost of money rises, businesses in the United States are both optimizing cost and even accelerating growth by forming advanced agreements. The inherent risk of cooperation is IP exposure. Businesses must trade information in order to work together toward a common purpose, and without a sophisticated understanding of IP licenses, neither partner could trust.

If we look at outcomes, joint ventures are some of the most successful, strategic opportunities a business can exploit. Using data from 2011 to present, joint ventures were most likely successful, and they frequently exceeded expectations. However, they were more likely to be successful when pursuing specified goals.

Due to notable successes, we are seeing an uptick in the number of joint ventures in North America. In fact, 53% of CEOs in North America are planning strategic alliances in 2017 (PwC, “Joint Ventures and Strategic Alliances”). Considering the currently hostile environment toward multinational businesses, the increase in joint ventures as opposed to M&A activity makes sense. Within the last year, M&A activity in terms of number of deals and transaction volume has declined for businesses under $500 M, with double-digit declines in activity for businesses under $250 M and a 15% decline for all product manufacturers (Factset, April, 2017).

Joint ventures are only one type of strategic alliance, and we can infer that other types of alliances are also satisfying the growth and optimization requirements of businesses without incurring the risks, taxes, or resources of M&A. Manufacturers consider the following agreements already.

1.     Trade Mark/Patent/Copyright License and Technology Transfer

2.     Manufacturing Agreements

3.     Information Technology and Communications-Related Agreements

4.     IP Selling/Assigning

Tactical agreements, such as these, work together to provide in sum a more flexible, adaptive entity, capable of withstanding more shocks without failure, capable of speculating on more growth opportunities, capable of waiting until more information supports additional commitment.

Contracting to Create Value

We project that during the first phase of this transition to richer contracting:

·      Enterprise will express interest in more nuanced agreements with suppliers

·      Mid-market B2B suppliers will first experience this trend in the form of requests for more complicated contracts

·      Best-in-class manufacturers will be ready to serve contracting requests efficiently on the sell-side and in addition be ready to make similar requests of their suppliers.

·      Businesses will define value in new terms – in terms of options, rights, data, technology, licenses, and more.

Resources

Arnaud Leroi and Philip Leung. “Tapping the Unexpected Potential of Joint Ventures.” Bain & Company, Inc.: Boston, February 8, 2017. http://www.bain.com/publications/articles/tapping-the-unexpected-potential-of-joint-ventures.aspx

Factset. “Flashwire US Monthly.” Factset Research Systems, Inc.: CT, April, 2017. https://www.factset.com/mergerstat_em/monthly/US_Flashwire_Monthly.pdf

PricewaterhouseCoopers LLP. “Joint Ventures and Strategic Alliances.” PwC: Delaware, 2017. http://www.pwc.com/us/en/deals/publications/assets/pwc-deals-joint-ventures-strategic-alliances.pdf