A Re-Examination of Corporate Strategic Alliances: New Market Responses
Keasler, Terrill R., Denning, Karen C., Quarterly Journal of Finance and Accounting
In a dynamic corporate environment, managerial actions change, and the market response to managerial decisions evolves. A decade after the seminal work of Chan, Kensinger, Keown, and Martin (1997) and Das, Sen, and Sengupta (1998), corporate use of strategic alliance contracting and the associated market response appear to have increased.
Strategic alliances are contractual business agreements to pool resources and engage in a new business venture with or without an equity investment. Typically, the business venture has a finite length with partners performing specific tasks and partner contributions in the area of technology, product development, marketing, licensing, research, or skills. Recent examples of these include the failed General Motors-Renault-Nisson alliance and the successful Hewlett Packard-Cisco alliance. In 2006 General Motors engaged in discussions with Renault-Nissan hoping to develop a global automobile alliance. The discussions were disbanded, however, when corporate executives could not agree on the alliance financial structure. GM believed Renault-Nissan should compensate them with a significant equity investment, while Renault-Nissan believed that a significant investment in GM might prevent them from successfully engaging in future contracts and alliances.
In a contrasting example, in May 2007 Hewlett Packard announced two successful alliance agreements with Cisco. Both are aimed at the fast-growing market of high performance computing and are intended to accelerate business growth. (2) The business arena is replete with so many examples of strategic alliances that business consultants to serve this particular niche also have grown and developed. CIT is one such example of a consulting firm that serves strategic alliance partnering firms. (3)
The intent of this manuscript is three-fold. First we examine the magnitude of corporate strategic alliance activity and conclude that it has increased since the study period of Chan, Kensinger, Keown, and Martin (1997) in the finance literature and of Das, Sen, and Sengupta (1998) in the management literature. Second, we question whether alliance activity is successful as measured by increases in shareholder wealth. We conclude, consistent with the work of Dacin, Hitt, and Levitas (1997), that approximately 50 percent of alliances fail. Finally, we examine factors that may help differentiate alliance activities that are beneficial to shareholders from those that may not be.
Theoretical Discussion and Hypothesis Development
Our initial hypothesis is that the magnitude of strategic alliance formation and the associated market response have changed over time. Casual empiricism suggests that strategic alliance activity has increased. Our hypotheses examine this and other hypotheses that are present in existing literature.
Hypothesis 2 is based on the work of Dacin, Hitt, and Levitas (1997) and Duysters, Kok, and Vaandrager (1999). It questions the random nature of alliance success. The results in these manuscripts suggest that over 50 percent of alliances fail.
Hypothesis 3 postulates that firms forming vertical alliances should realize significantly higher abnormal returns than firms forming horizontal alliances. The competitive theory suggested by Park and Russo (1996) provides the foundation for this hypothesis. Their results suggest that firms with the same three-digit SIC codes experience lower announcement day abnormal returns than firms with different three-digit SIC codes. (4)
Hypothesis 4 suggests that smaller firms experience abnormal returns that are significantly different from those of larger firms in an alliance. (5)
Hypothesis 5 is that technology firms' abnormal returns are significantly different from those of other types of firms. This hypothesis has its empirical foundation in the research of Chan, Kensinger, Keown, and Martin (1997) and Das, Sen, and Sengupta (1998). …