Strategic Alliances: Leverage Strengths, Minimize Weaknesses

The merger and acquisition market has been hot for manufacturers in the first half of 2016, and the momentum is expected to continue through year end. Some business owners are uncertain about buying and selling, however.

A strategic alliance may be a worthwhile alternative for gun-shy owners. Over the short term, it offers the best of both worlds: You retain control over your business while having access to your partner’s resources. Over the long run, a strategic alliance provides an opportunity to test whether your partner could be a good fit for a future merger.

Think of a strategic alliance as a near-term growth and expense-cutting mechanism that offers potential long-term benefits. Initially you should focus on such objectives as better economies of scale. For example, by combining orders for everything from raw materials to office supplies, both companies may qualify for supplier discounts and be able to reduce overhead costs.

Or you may want to find a partner to:

• Improve transportation logistics by consolidating warehouses
• Jointly purchase manufacturing equipment
• Upgrade your IT network or accounting system
• Share intellectual property such as customized software

Additionally, a strategic alliance could help you build a presence in an unfamiliar market sector. For instance, your partner’s more experienced sales team could be instrumental in introducing your products to new geographic territories where your partner is already well known.

Successful alliances also help the partners envision what a permanently combined organization might achieve. It’s not uncommon for a strategic alliance to begin informally or as a short-term agreement and eventually lead to a merger when the two companies realize that together they’re more than the sum of their parts.

A prior relationship can improve the chances that the merger process will go smoothly. Before joining in a strategic alliance, companies typically perform due diligence on each other and consult with their legal advisors.

Financial and other conditions can certainly change between the initiation of a strategic alliance and the beginning of merger negotiations. But a good alliance allows companies to keep tabs on each other. If one of the companies experiences leadership challenges or has trouble getting financing to make a major purchase, the other is likely to know about it. Such knowledge can speed up the M&A transaction process and make integration much simpler.

Unfortunately, strategic alliances don’t always last. If the alliance is merely puttering along — or worse, proving a drain on resources — you need to take immediate action.

Some problems can be fixed. For example, it’s easy for alliances to drift from their original purpose. A partnership forged mainly to upgrade information technology could wind up focusing on improving employee productivity, with mixed results. In this case, the partners should work together to bring the organizations’ focus back to the agreed-upon set of goals. If the goals aren’t clear, the partners should clarify them.

Other problems are irreparable. Your partnership agreement should specify conditions and processes for unwinding the relationship if the need arises.

The key to successful strategic alliances is finding the right partner. It’s often a competitor, supplier or customer — but it also could be a company outside your supply chain that’s looking to expand into new markets. Your legal and financial advisors can help find a partner that’s a good fit today and has the potential to grow with your business over the long haul.