CONFIDENTIAL/INTERNAL ONLY

Alliance Structures

STRATEGIC ALLIANCE PRACTICE

Discussion draft
July 1995
 ALLIANCE STRUCTURES

The purpose of this document is to help CSTs understand the

full range of alliance structures that are available to clients,
and provide frameworks for selecting among alliance, M&A,
and arms-length contractual options.

This draft document has been developed as part of a broader,

ongoing practice effort on negotiating and structuring
alliances. The document has four sections:

1. Typology of alliance structures

2. Frameworks for selecting structures

3. Alliance structures: definitions and examples

4. Illustrative structures.

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 1. TYPOLOGY OF ALLIANCE STRUCTURES

Focus of this document: types of alliance structures

Scope Products Geographies Assets/ Skills

What is in the alliance? activities

Governance
Board Roles of parents, Mgmt
How can we manage it
composi- JV Board, JV CEO
effectively?
tion

Valuation Capitaliza-
Legal/financial Type of and tion and Exit
What should be the alliance ownership financing provisions
ownership and financial shares
arrangements?
Focus This document focuses on clarifying types of alliances; for a
of this broader perspective on developing alliance structures, see
document “Core Beliefs – Designing Successful Alliance StrategiesÝ or
“Best Practices and End Products – Developing Successful
Alliances,Ý or contact David Ernst (DC) or Trond Riiber
Knudsen (OL) for results from a current practice project
DC-ZXE070/950726DHR.1
 What is a strategic alliance?

Elements Comments
Joint contributions Each partner contributes capabilities, e.g., skills,
access to markets, assets
Influence without Partners are able to influence assets without full
full ownership ownership
Shared control, Parents share control and/or ownership of
ownership, risk, business system, leading to shared risks or
and reward rewards
Exclusivity There is typically some degree of exclusivity

Temporary Strategic alliances are typically intermediate

strategic vehicles

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 Strategic alliance: a definition

Intermediate strategic vehicle involving substantial

shared risk, cost, or reward
without full control, and with a significant
degree of exclusivity

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Not all corporate relationships are strategic alliances

Are they
strategic alliances?

Acquisitions No

Mergers Rarely

Corporate Joint ventures Yes

relationships
Partial equity investments Only if combined with JV or
• One-way minority stakes contractual alliance
• Cross-equity stakes
May be alliances,
Contractual agreements depends on level of shared risk,
(parent-to-parent) reward, exclusivity
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 Broad types of alliances are
based on ownership, contributions
Strategic alliances
CORPORATE
RELATIONSHIPS
* Debatable, these are mergers at BU level; JV at parent level
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** Specific terms of each contractual agreement determine whether they are strategic alliances. Contractual alliances
are often referred to as joint ventures; in our definition a joint venture must include the creation of a separate entity.
Mergers in which a single combined entity retains ownership and
Acquisitions
control after the deal
Mergers
Mergers in which both parents retain significant ownership and
control, e.g., merger of business units, held as
50-50 JV after the deal*
Startups in which both parents contribute assets, technology, people,
other capabilities
Formation of JV in which parents contribute ongoing business,
significant assets, capabilities
Joint ventures Formation of “shell” JV – small management or marketing/sales
company which uses other business elements that remain with
parents
“Partial acquisition” JV – one parent takes substantial stake in other
company (often contributing cash and skills or technology) while a
Minority equity new “JVÝ entity is created
investments
between parents One-way or two-way minority investments with JV or contractual
alliances
Minority investments – without JV or contractual alliance
Contractual alliances with substantial shared risk/reward
or exclusivity** • Exclusive supply
• R&D partnerships • Exclusive distribution
Contractual • Exclusive licensing • Co-branding
agreements • Strategic outsourcing • Joint bidding
Arms-length agreements without
substantial shared risk/reward or exclusivity**
• Franchise • Long-term purchase
• Production swap agreement
• Co-production • Buying cooperatives
Each structure has distinct features

Contractual Joint ventures Minority Mergers Acquisitions

Feature alliances stakes*

Control None/limited Shared None Unified control (but Acquiror gains full
few true mergers of control
equals)
Ownership None Shared ownership Typically 10-20% Unified Complete
of JV entity
Influence of Can be substantial Substantial Some, may receive Depends on power Complete
parents (one JV) Board seats balance
Pooling of No Yes, for assets in JV No Yes Yes
assets
Legal Contract New corporate or None except minority Single entity Single entity
relationship partnership entity shareholder rights
created
Governance, Not an issue Must be determined Per minority Typically determined Acquiror decides
dividend policy in advance shareholder rights in advance
Capital None except per Partners typically Cost of minority stake Capex of both Cash outlay include
expenditure/ contract share capex for companies combined premium, full capex to
cash outlay startup, continuing both companies
operations
Valuation/ None No premium; partner None No premium Substantial premium
premium with lesser value must
compensate for value
gap or accept <50%
ownership
* Without associated JV or contractual alliance

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 Many structuring options within each type of alliance
Example: JV structures
Majority/minority (typically in range of 20/80 to 80/20)
Ownership 50/50
3-party, usually 2 large, even shareholders, 1 small (e.g.,
49/49/2%)
General
Partnership
Limited
Legal form (U.S.) C
Corporation S
Limited liability corporation
Full
Business system Partial
OPTIONS FOR
STRUCTURING Limited
Geographic Unlimited
JVS
Scope
Existing
Products/ New
technologies Limited scope
All products

Mergers in which both parents retain significant ownership and control,

e.g., merger of business units, held as 50-50 JV after the deal
Startups in which both parents create a new business by contributing
assets, technology, people, other capabilities
Formation of JV in which parents contribute ongoing business,
“Mechanics” significant assets, capabilities

Governance Formation of “shell” JV – small management or marketing/sales

company that uses other business elements that remain with parents
Financial flows
“Partial acquisition” JV – one parent takes substantial stake in other
Other elements company (often contributing cash and skills or technology) while a
new “JV” entity is created
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 Many important, sensitive governance choices ILLUSTRATIVE

All insiders
Who
Insiders plus outsiders
How many
Even number, parents equally represented
Board (with conflict resolution mechanisms)
Balance One parent has majority
Odd number
Parents have equal numbers,

Majority vote – all issues tiebreaker vote held by outsider

Voting Veto power or supra-majority

voting on key issues
GOVERNANCE Specific issues delegated to each partner

Role JV highly independent, treated as autonomous unit by both parents

of parents JV treated as division of one parent

Insider
Outsider
CEO Appointed by one parent

Staffing Selected by both parents

of JV
Determined by JV CEO with approval of Board
Other key
appointments
Specific spots (e.g., CFO) reserved for
parent selection
Other
governance
elements
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2. FRAMEWORKS FOR SELECTING STRUCTURES

Choice of structures depends

on objectives and business environment

Corporate
relationships

Contractual Joint ventures Minority Mergers Acquisitions

alliances stakes

• Desire to influence rather than own • Desire for full control

• New business or geography
• Similar partner size/strength
Use JV/ • Need for complementary capabilities
contractual
alliance • Unpredictable environment
• Need to bridge multiple businesses,
technologies
• “Web” is winning model
• Core business, geography
• Difference in partner size, strength
• Need for scale
Use M&A
• Predictable environment
• Need for integration
• Business not yet fully concentrated
• “Monolith” is winning model

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 Objective drives choice of specific alliance type PRELIMINARY

Objective Specific alliance type

JV, franchising, co-branding, out-licensing, co-

Enter new markets/channels
production, distribution
Combine
complementary Create new business JV, others
resources Access specific products, JV, in-licensing co-production, franchise
assets, functions
Develop technology jointly JV or parent-to-parent R&D partnerships

Leverage existing capabilities Licensing, co-branding, distribution JV, others

Gain scale with complementary partners
Consolidate for synergy M&A, JV combining specific functions

Technology JV, licensing, R&D partnerships

Learn
Skills JV; minority stake; R&D partnerships

Develop industry standards R&D partnerships

Manage rivalry
Rationalize capacity Production swap, co-production, JV; minority equity
interests, joint bidding, merger of units as JV, M&A
Minority equity, e.g., Keiretsu (effectiveness is
“Lock up” supply source/ questionable); supply contract, long-term purchase
Improve effective-
customers agreements
ness of vertical
relationships Improve supplier/manufacturer/ Supply contracts, strategic outsourcing, buying
customer linkages cooperatives, long-term purchase agreements,
minority equity (effectiveness is questionable)
Position to Acquire JV or minority stake in parent, depending on
acquire or sell Sell desired scope of acquisition/divestiture
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 FOR DISCUSSION
Business environment
affects choice of vehicle Highly appropriate
Neutral
Inappropriate

Contractual Minority
Environmental conditions alliance JV stake Merger Acquisition
Uncertainty (e.g., regulatory, political)

Need to bridge multiple businesses or

technologies
Business already global/highly
concentrated (few acquisition targets)
Target business is small part of *
partners) total business
Large difference in size with potential ** ***
partners
Differing perceptions of importance of
target business to partners core
**
businesses

* Acquisition of target business unit

** JV may be appropriate as step toward acquisition
*** Minority stake taken by larger company in smaller company

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Structures offer different levels of PRELIMINARY

influence, ownership, risk-sharing

Strategic alliances

Merger of Acquisitions
units as JV
Exclusive Minority stakes
licensing with operating Full mergers
alliance
R&D partnerships Exclusive JVs
or consortia distribution

Strategic Co-branding Keiretsu

outsourcing
Exclusive Joint bidding
supply contract agreement
Long-term pur-
chase agreement
Buying
Increasing influence

cooperatives
Co-production

One-off arms- Production swap Minority stakes –

length financial only
transactions Franchises

NO SHARED Shared resources, no equity Cross-equity Shared equity Owned equity

RESOURCES, OR investments
EQUITY; LIMITED
SHARED RISK INFLUENCE ASSETS WITHOUT OWNING THEM; SHARE RISK OWN ASSETS
ABSORB FULL
Increasing ownership and shared outcome RISK
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Alliance selection driven by need
to share or divide business elements
Technology Product Sales and
Sourcing Manufacturing Marketing
development development distribution

Sharing Buying Manufacturing JV Co-marketing

business cooperatives Bidding consortia
elements

Research and development

<Text> Co-branding
consortia
Joint ventures

Dividing Research and development Long-term Co-production; Exclusive sales

business consortia, each partner specializing purchase production swaps and distribution
elements (e.g., airframes) agreements licenses
Strategic
outsourcing
Technology licensing Exclusive supply Technology/
contract manufacturing
licenses
Joint ventures

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 PRELIMINARY
Choice of structure influenced by need
for integration, need for flexibility
Strategic alliances

M&A
High

JVs

R&D
partnerships

Exclusive licensing
Need for integration

Exclusive distribution
Strategic outsourcing
Exclusive supply

Other long-term
Co-branding
nonequity agreements

One-off arms-
length transactions

Low

Low High
Need for flexibility

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 Choice of specific JV structure should PRELIMINARY/
INTERNAL ONLY

take tax, legal factors into account (U.S.)

TAX/LEGAL General Limited Limited liability
FACTORS partnership partnership “C” corporation “S” corporation* company

Pass-through** Yes (most taxes Yes No, double Yes Possible,

taxation? passed through taxation on depending on
to each venturer) dividends structure

Subject to franchise No No Yes Yes Yes

taxes?

Is flexible allocation Yes Yes No No Yes

of revenues,
deductions between
partners permitted?

Flexibility in exit No; venture may terminate for tax Yes (merger, Yes No
strategies? purposes if >50% interest transferred consolidation, tax-
within a 12-month period free
reorganization,
etc.)

Are shareholders Yes, personal No (limited partners No No No

liable for debts, liability of each not liable)
liabilities of alliance? venturer for all
debts, liabilities

* Shareholders must be individuals, estates, trusts; “SÝ corporations cannot be members

of an affiliated group, therefore not relevant to large corporations
** Taxes apply only to corporate owners on distribution of dividends
Note: McKinsey does not provide tax advice; clients should consult their own tax advisors

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Ownership share of JV affects PRELIMINARY/
INTERNAL ONLY

financial impact on parents (U.S.)

Corporation ownership*

<20% 20-50% >50% Partnership

Can assets, revenues be No No Yes Typically based on proportion

consolidated (for of ownership, but can be
accounting purposes)? allocated based on other
methods

How is net income As minority Using equity 100% of net Typically based on proportion
reported? interest, using method income reported; of ownership but can be
equity method carve-outs allocated based on other
reported as methods
negative minority
interest

* Test is based on control, not ownership percentage

Note: McKinsey does not provide tax advice; clients should consult their own tax advisors

DC-ZXE070/950726DHR.1
 PRELIMINARY/

Summary: tax, financial issues (U.S.) INTERNAL ONLY

Tax issues Liability Consolidation

• Partnership – normally the most tax-
efficient structure; no intercompany
dividend taxes
• Corporate structure – dividends taxed
– 80% exclusion of dividends from
taxes if ownership is >50-80%
– 70% exclusion from dividends if
ownership is 20-50%
• JV partners may face unlimited liability • For accounting purposes, control is
if partnership structure used required (voting rights, board
• Corporate structure limits liability of representation)
each partner in JV • For tax purposes consolidation occurs
at 80% ownership

Note: McKinsey does not provide tax advice; clients should consult their own tax advisors

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3. ALLIANCE STRUCTURES: DEFINITIONS AND EXAMPLES
Alliance structures
Type of alliance Definition Example

CONTRACTUAL
ALLIANCES

• Franchise A license agreement which includes the right to McDonalds

agreement conduct business using the name, logos, and
trademarks of the franchiser

• Production swap A contractual agreement between two or more Oil, commodities

agreement entities producing similar products wherein each
agrees to specialize in a certain product which is
then exchanged for equivalent value of other
products; this type of cooperation is often used to
reduce transport costs

• Long-term purchase Agreements spanning several years, typically
agreement committing supplier to meet specific design or
delivery standards and committing buyer to minimal
levels of purchases; may involve shared
investment
Coors and Anchor Glass have a 10-year
partnership to make glass bottles. Coors
contributes staff and equipment. Anchor will invest
$54 million to modernize a plant and increase
capacity by a third.

• Buying cooperative Several companies pool purchasing to increase Bell Atlantic, Nynex, and Pacific Telesis say they
bargaining power with suppliers will pool their orders for roughly $800 million in set-
top boxes to reduce costs of the devices

• Exclusive supply A contractual agreement between two or more Sony will use IMAX as its exclusive supplier of the
contract entities binding each in an exclusive IMAX giant-screen movie systems in NY, Berlin,
supplier/customer relationship for given products in and San Francisco. Sony will build the theaters,
given markets produce IMAX format movies, purchase IMAX
projection technology and pay IMAX a percentage
of box office receipts.
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Alliance structures (continued)

Type of alliance Definition Example

Joint bidding • A contractual association of independent entities • TNT Express Worldwide and Schenker International
agreement formed for bidding on one or more contract will jointly bid for logistics business in Asia and North
opportunities America. Schenker deals in large freight and cargo;
• Successful contract bids may be subdivided TNT deals in overnight small package delivery.
among participants or delegated to one of the • Offshore drilling consortia are another example
entities for completion on behalf of the consortium
• The agreement is a strategic alliance if it provides
for an ongoing commercial relationship after the
project is subdivided

Strategic A long-term agreement whereby one company EDS reportedly signed a 10-year, $800 million
outsourcing transfers to another, and purchases, a service or agreement to manage Lucas Industries internal
product formerly made internally information services

Co-branding Two or more entities combine brands for one or Blockbuster and Visa jointly issue credit card
more products

Exclusive licensing A contractual agreement between two or more
agreement entities granting one entity exclusive access to and
use of technology or intellectual property developed
by the other, usually coupled with authorization to
produce, distribute, or service products
Schering-Plough has access to Fareston (breast cancer
treatment) produced by Orion, in return for an
undisclosed upfront fee plus milestone payments

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Alliance structures (continued)

Type of alliance Definition Example

Exclusive Agreement under which one company gains the right Budweiser beer is distributed by Antarctica in Brazil
distribution to distribute (and possibly manufacture) a product on an exclusive basis. Anheuser-Busch also bought a
agreement using the technology, patent, or brand owned by 10% stake in Antarctica for $105 million with an
another company option to increase to 35%.

R&D partnership A contractual agreement between two or more
agreement entities wherein each agrees to fund a specified type
of research in return for mutual benefit from the end
products; the technology developed can be licensed
to one or both of the participants, or an outsider
GE (U.S.) and IHI Heavy (Japan) have a $400 million
alliance to co-develop a jet engine for use in 80-seat
planes; GE will fund 75% of development costs, IHI
will fund 25%

Consortia • A combination of three or more entities in which all Airbus

parties work together toward a common goal,
without creating a formal JV entity
• Consortia participants typically share risk (while
reducing risk for each participant), benefit from
different skill sets of the partners, and gain benefits
of scale
• Consortia can be used to share activities (e.g., R&D
consortia), or divide activities (e.g., aircraft and jet
engine consortia)

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Alliance structures (continued)
Type of alliance Definition Example

EQUITY ALLIANCES

• Keiretsu Sets of companies linked together by minority Toyota, Koyo Seiko, others
equity stakes and semi-exclusive supply
arrangements

• Minority equity Minority investment of one company in another, Boehringer Ingleheim invested $28 million for an 8%
stake with with other agreements creating shared risks or stake and provided a $40 million credit line to ISIS, a
operating rewards biotech company; the two companies are conducting
agreements joint research on cell adhesion, and Boehringer has
option to raise its stake to 15%

• Joint venture • A contractual agreement between two or more Siemens and Swatch have created a JV to jointly
entities creating a new equity-based entity to develop mobile phones to be sold under the Swatch
carry on an economic activity name
• Ownership, control, and decision making are
shared and both (or all) partners typically
contribute to the operating entity

• Merger of units as JV where two (or more) parents merge overlapping Rhone-Poulenc, Hoechst merged their South
joint venture assets and capabilities into a single entity, but American polyester and nylon fiber businesses into
neither parent cedes control, e.g., merging Fairway Filamentos, to be headquartered in Brazil
business units where each parent holds 50%
interest

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 4. ILLUSTRATIVE STRUCTURES

Stand-alone joint venture INTERNAL ONLY

WestCo JV Board EastCo

(WestCo/EastCo) Pros
• Equal ownership
Oversight • NewCo able to
develop own identity
People People • Performance easy to
measure
Products NewCo Products
Customers • 50/50 joint venture Customers
Operations • Private-label
Operations Cons
Capital merchandise sold via Capital • Potential conflict over
new channels to transfer pricing for
services provided by
existing customers of
parent
WestCo and EastCo • Potential conflict with
– Multimedia core parent
marketing businesses in new
– International geographies, unless
expansion geographic scope
limited

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Sanofi/Sterling alliance structure CONFIDENTIAL/
INTERNAL ONLY

Partial merger/JV plus development partnership

Elf Acquitaine Kodak
(49% French
government)

100% 100%
Sanofi Joint clinical Sterling Drug
(discovery) development (discovery)
(project-based)

Drugs sold through worldwide

Territory A JV Sanofi/Winthrop joint production, Territory B JV
(Europe, Asia*, Africa) distribution, marketing (Americas, Australia)
51% Sanofi/ 51% Sterling/
49% Sterling managed 49% Sanofi managed by
by Sanofi Sterling
100% 100%
Local Local
subsidiaries subsidiaries

* Japan excluded
Sterling/Sanofi alliance CONFIDENTIAL/
INTERNAL ONLY

Guiding principles… …drove structure

• Maximize synergies (e.g., capture full merger
effect at country level)
• Create indifference to which products are sold
post deal
• Ensure that each partner receives fair value Separate upstream research;
– “Existing” product profits shared based on joint product development,
ingoing contributions separate JVs for manufacturing,
– “New” product profits and synergies marketing, sales, distribution
shared 50/50
• Optimize tax/financial effects of alliance
• “Equal” control over combined activities
• Retain control of basic research
• Create a manageable structure
 CONFIDENTIAL
50/50 JV created by merger INTERNAL ONLY

of two metal mining subsidiaries

NewCo board

Equity of Brazmine, Equity of SAFmine,

investments investments
BrazilCo SAFCo
(parent) (parent)
Dividends NewCo Dividends
International
JV
100% equity 100% equity

NewCo NewCo
Brazil South Africa
Supply of Supply of
administrative Transfer of all administrative
services assets, services
at cost employees at cost
BrazilCo and activities; SAFCo
(Subsidiary B) subsidiary (Subsidiary B)
then

x x
terminated
(Subsidiary A) (Subsidiary A)

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 CONFIDENTIAL
INTERNAL ONLY

JV plus minority stake –

P&C Insurance Co. and fund management firm
Before After

YFM YFM Minority

Brinson Partners acquisition
Brinson YKB Chicago
(P&C Co) (Fund Partners
15%
mgmt firm) YKB London

100% 100% 100%

60% 40%
Brinson Japan
YFM Yasuda
investment Kasai Brinson (YKB)
subsidiary (P&C fund mgmt JV)

Strategic needs

P&C Co Fund mgmt firm

• Enhance investment- • Enter Japanese pension fund
management capability management
• Enter Japanese pension fund• Realize capital gain from sales
Source: FAC Practice
management of shares (for partners)

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 CONFIDENTIAL
Japanese/foreign JV structures where INTERNAL ONLY

ownership has shifted to foreign partner

Yokogawa – Hewlett-
Pfizer – Taito Packard BOC – Osaka Sanso

Joint venture F J F J F J

50% 50% 49% 51% 50.5% 49.5%

J/V J/V J/V

Post- F J F J F J
joint venture

100% 75% 25% 42% 100%

F(Jsub) J/V J(sub)

Comments F gradually increased share J acquired 840,000 shares of • BOC provided special gas
and finally acquired HP itself technology to Osaka
• BOC initially acquired 15%
of J and increased its
Source: FAC Practice ownership to 42%

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