Buy vs. Partner: Focus on control

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Deciding when M&A or an alliance is the right path to growth

Weighing investment, access and ownership in deal structure

Companies that consider acquisitions and alliances often seek access to something they don’t have. It can be something they don’t have enough of or something altogether new – products and services, technology and intellectual property, or markets and geographies. Gaining access requires a certain level of investment. That investment and the deal structure can be influenced by the amount of control a party wants over the assets in question.

The greater the investment – especially in an outright acquisition – the more control a company usually has. That might provide some comfort, but the stakes typically are higher. Beyond the greater costs, full ownership often brings full responsibility; going forward, the buck stops with the acquirer. Some companies may have neither the ability nor the appetite to assume that additional accountability.

Alliances, joint ventures (JVs) and other strategic partnerships generally don’t grant the same level of control as M&A. But if they still achieve the desired access without the greater investment, the tradeoff can be worth it. In lieu of total control, a company may have more options for a deal structure. A JV is a newly-created entity in which ownership is shared by partners. An alliance usually is less formal, with partners forming an agreement on how their existing enterprises will collaborate.

These varying levels of control are important for companies to consider as they pursue growth beyond organic expansion. Any commitment of capital, assets and/or intellectual property is an investment, and a company should be confident that investment includes an appropriate level of control, based on the deal structure.

Key questions on control in acquisitions and alliances

Asking these questions about control can help shape the decision to buy or partner with another business.

What type of control do you need?

There are different types of control, including strategic control, operational control and financial control. Some might be more important than others, and the requirements of each can help inform the deal. For instance, if control over a specific process, such as R&D or production, is necessary but control over distribution isn’t, a more limited-fit JV or similar collaboration may be appropriate. The type of control is just as relevant as the amount.

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Can resources be accessed and maximum value achieved without equity?

When the desired assets are too expensive or stray too far from the main business strategy, a company may place less importance on having full control through an acquisition. Owning something also often requires reinvestment to maintain its value – particularly in technology. If the target isn’t a core capability, a partnership can provide access while preserving capital for another, more efficient use.

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How much time are you willing to invest – for a specific deal and others?

Investing at a lower level and partnering instead of owning doesn’t necessarily mean less work, but rather a different kind of work. For instance, JVs can be harder to manage than M&A because they’re usually active longer than an acquisition and integration. If a company doesn’t have JV management capability, it may be better off pursuing M&A. Another option is building a JV/alliance management function with an eye toward multiple partnerships that could leverage that new function.

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How certain are the capabilities and markets?

Deals in which a potential acquirer or partner has more certainty about the target and its market often gravitate toward M&A. Stability in a target’s business model or the way its products are sold and consumed can give a company more confidence to take ownership. When there’s a higher level of uncertainty, such as with emerging technologies or services more susceptible to disruption, a company may value full control less than a looser relationship through an alliance.

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Can people and systems be aligned while keeping parties independent?

The control gained through M&A can be a mixed bag if talent isn’t retained. Acquisitions sometimes involve delicate negotiations to prevent “brain drain” – the departure of key employees who are worried about the new company’s future. JVs can help with talent retention because one company isn’t swallowing another; the partners are moving teams and processes to a new, independent entity – one in which each partner usually has a financial interest that could pay off long-term.

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Is the control choice out of your hands?

Sometimes the deal decision and structure may be decided by particular situations or conditions. A partnership could be the only way some industries do business in some countries, such as China. Or in certain sectors, a stronger investment – either a JV or M&A – may be necessary as a defensive tool to prevent a competitor from gaining access to desired resources. With the latter, the control aspect isn’t just about the assets in the deal but about control of a market or industry.

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Industries in which control can drive a decision on mergers, acquisitions and partnerships

There’s no ironclad rule on which industries are better for acquisitions and which are more suitable for alliances and JVs, but certain circumstances and attributes can guide the degree of control in deal structures. For instance, an opportunity that involves more specific, durable assets may work well as an acquisition due to larger capital outlays and longer time horizons. The same may hold for deals involving highly complex products or proprietary products and services, in which access to those products may be limited in a partnership.

But the characteristics of some sectors can factor into the control conversation. For instance, companies in two significantly different industries – oil and gas and pharmaceuticals and life sciences – can share a couple of traits: They often have plenty of cash but not enough personnel to execute multiple acquisitions at the same time. In those cases, JVs can provide a measure of control and create an “options portfolio” in which they could acquire a partner in the future.

Oil and gas companies have to deal with another influence on control: cross-border deals. Some oil-rich countries have national oil companies that control resources, and partnering often is the only way companies from other countries can work there. Aerospace and defense firms also have to negotiate how much control they can have in deals across country lines. As some US companies look abroad for growth, they can face export restrictions on weapons systems and technology transfer and may need to form partnerships with overseas firms to access those markets.

Gaining more control over time through alliances and M&A

As mentioned above, there can be situations in which partnership evolves to ownership, with the control dynamic changing over time. That could be the intention at the outset, or it could emerge as an option as the relationship progresses. Such evolutions occurred in 2018 in industries ranging from real estate to metals to textiles.

Unless there’s absolutely no appetite or potential for an eventual acquisition, companies that start with a lesser degree of control should consider a fluid structure for the alliance or JV. In such cases, the ownership interests may not be definitive on Day One, but rather there can be steps at which the partnership takes a different path depending on the investment-return profiles of each party. That may include anticipated exits, but partners also can map out how the collaboration could advance to a stronger bond.

Taking this approach instead of plunging into M&A at the start can allow a would-be acquirer to minimize risk by learning and conduct dutiful diligence of a business over time. The lesser amount of control initially can be offset by peeking behind the curtain and figuring out during the alliance/JV what issues will require how much attention when you take control through an acquisition.

Some companies frequently take this approach to increasing control, progressing from an alliance to a JV to an acquisition over the course of several years. While each potential partner or acquisition target is different, having a model that includes deliberate steps toward ownership can be useful. It can mean less risk at the start, more opportunities to learn during the partnership, a clearer idea of an acquisition price and better chances for successful integration. The key is being comfortable with the level of control at each stage of the conversation.

Contact us

Gregory McGahan

Partner, Deals, Alliances Services Leader, PwC US

Mel Niemeyer

Deals Partner, Deals Strategy Leader, PwC US

Mile Milisavljevic

Oil & Gas Deals Leader, PwC US