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Sometimesalliancesmakemoresensethanmergersoracquisitions.DAVIDERNSTANDTAMMYHALEVYTheMcKinseyQuarterly,2004Number1Ashigh-techcompanieswrestlewiththecomingwaveofrestructuring,executivesshouldconsiderthefullrangeofdealoptions:notjustmergersandacquisitionsbutalsoalliancesandjointventures.Insomecases—whencompaniesareunwillingtoselloracquisitionpremiumsaretoohigh—alliancesarethenextbestthingtoamerger.Inothercases,theyareactuallypreferabletoM&A.Experiencefromarangeofsectorsshowsthathigh-techCEOsandCFOsshouldconsiderseveraltypesoftransformationalalliances.First,whenparentcompanieswanttostayinvolvedinabusinessbutneedtogainscaletocompete,theymayunitebusinessunitsintoajointventure;SonyandEricsson,forexample,combinedtheirmobile-handsetunitstotakeonNokiaandMotorola.(OtherexamplesincludeSpansion,whichcombinestheflashmemorybusinessesofAMDandFujitsu,andRenesasTechnology,the$8billioncombinationofHitachi抯andMitsubishiElectric抯semiconductoroperations.)Jointventuresfacemanyofthesameintegrationchallengesfoundinlarge-scalemergers,andthepartnersmustcopewiththeaddedproblemsofsharedownership.Nonetheless,jointventurescangeneratesynergiesequalto50to75percentofthevalueofthecontributedbusinesses,boththroughincreasedrevenuesfromastrongerproductlineandthroughcostreductionsduetoscale.MarathonAshlandPetroleum—aprofitablejointventurethatgenerated$450millioninnetincomein2002byoperatingrefineriesandretailstations—isasuccessfulexampleofthistypeofallianceinamatureindustry.Companiesshouldalsoconsiderjointventuresandnonequityalliancestosharerisksandcostswhenenteringnewmarketsorthinkaboutinvestinginnext-generationresearchormanufacturing.Severalsemiconductorcompanies,forexample,havejoinedforcestodevelopanext-generationmanufacturingprocesstechnology.Thistrendwillstrengthenascostsriseforthecominggenerationofchips.Similarly,manychemicalandpetrochemicalcompanieshavecreatedjointventurestosharethecostsofmajornewplantsandtodevelopnoveltechnologies.UnionCarbideandAlliedSignal,forinstance,combinedtheirskillsmorethan15yearsagotolaunchUOP,ajointventurethatdevelopsprocesstechnologyfortheoil-refining,petrochemical,andgas-processingindustries.Ithassincegrowntobecometheworld抯largestprocess-licensingorganization,withreportedannualrevenuesofmorethan$800million.Alliancesarealsoausefulwaytoreduceexposurefromorinvestmentinnoncoreorcommoditizingpartsofthevaluechain.Insomecases,theseallianceswilltaketheformofoutsourcingandoffshoringarrangements.Otherswillcreatenewcustomer-supplierrelationshipsbyhelpingcustomerstoshednoncoreassetsandsupplierstoincreasescale,ashappenedwhenNECenteredajointventurewithSVAforthin-film-transistorliquidcolordisplays.ThejointventureinChinapermitsNEC抯liquid-crystal-display(LCD)businessinJapantofocusoninnovationandcustomization,whileallvolumeproduction,development,manufacturing,andsaleswillbehandledthroughthejointventure.Astechnologycompaniesoutsourcetheirmorecomplexactivities,theywillresorttomorecomplexkindsoffinancing,tojointventureswithbuyoutoptions,andtoothercreativepartnershipstructuresthatmitigaterisk.Whentechnologyplayersreachforscopetoprovideintegratedsolutions,they抣llookoutsidetheirsandboxesandformallianceswithcomplementarybusinesses,ashappenedwithpharmaceuticalsandbiotechnologyaswellaswithbankingandinsurancecompanies.Indeed,asthevolumesofdatageneratedbybiotechresearchhavecreatedaneedforspecializedhardwareandsoftware,IBMhasdevelopedaportfolioofbioinformaticsallianceswithcompaniesincludingMonsantoandAppliedBiosystems.Someoftheseallianceswillbemarriagesforlife.Inothercases,alliancesandjointventureswillbeusedappropriatelyasawaytoprovideatransitionoutofabusinesswhenanoutrightsaleisn抰feasibleorattractive.Boardsandexecutiveswillneedtochoosetheirstrategiesandpartnerscarefully,keepinginmindadeal抯likelyevolution.Butgiventheforcesatwork,managersshouldavoidjumpingtotheconclusionthatamergeroracquisitionwillsolvethechallengestheyface.Byconsider-ingalltypesofdeals,theyaremorelikelytofindtheonethatmakesthegreatestlong-termstrategicandfinancialsense.Notes:DavidErnstisaprincipalandTammyHalevyisaconsultantinMcKinsey抯Washington,DC,office.