In the good old days, a decade or so ago, firms bought their rivals when they wanted their technology or market share. Interlocking businesses were what the Japanese did, and that was bad. Now alliances and partnerships are the flavor of the millennium across the world, and business rivals swap technology and enter into almost promiscuous partnerships with their competition.
John Harbison, vice president at Booz-Allen & Hamilton, is a full-time student of strategic partnerships and alliances, which he says ‘are an important part of the growth propositions of companies nowadays.’ He explains: ‘Most companies are in industries experiencing some kind of convergence, and they have to access capabilities that they didn’t think they needed before, to extend beyond what they have the time or internal resources to do.’
In 1980, alliances represented 1 percent of revenue, now in the US it’s up to 17 percent ‘and still heading north,’ he reports, while in Europe it is in the mid 20s. The big investor relations asset of alliances is that when they work they produce results. Harbison claims ‘the average return on investment in alliances is 18 percent, compared with overall corporate endeavors at about 11 percent. ‘We compared the 25 most active in alliances with the 25 least active, and their return on equity was over 17 percent versus 10.1 percent.’ It is, he says, ‘a compelling story – which investors are usually pretty interested in.’
Harbison also suspects investors may be interested in Harvard Business School research showing that alliances tend to raise the stock of both companies involved, while acquisitions tend to just raise one. ‘I remember when AOL announced a link-up with Hughes electronics; the AOL stock value jumped about $8 bn that day.’
Long memory
The drawback for investor relations is that people tend to remember bad news. ‘There are some alliances that have been unsuccessful and they can persuade analysts that they don’t want anything to do with future alliances,’ Harbison confesses. ‘In fact, first time alliances don’t work too well. Some newcomers can’t tell the difference between an acquisition and a partnership, and fail to work out what it is that they want. They tend to approach an alliance like an acquisition.’
The good news is that companies that are promiscuously experienced in partnerships and alliances are successful nine out of ten times. However, if successful partnering is a knowledge-based attribute, often the allies are knowledge-based companies, trying to pool technology to add value for each other. Over half the alliances formed in the US have been in the electronics, communications and software sectors, which represent an increasing share of market cap.
Harbison singles out Corning for its decades-long experience, and success, with alliances. Corning IRO Katherine Dietz is eager to point out the financial fruits of the policy, but is also well aware of the IR obstacles it can pose. ‘Having many ventures as part of your company does make it more complex for investors.’ She also admits, ‘Analysts do like things in neat segments, and investors rely on me quite heavily in terms of trying to model the venture income for Corning. They may say that it makes the company more complex, but I don’t feel that it makes my IR job all that much more difficult, since I usually talk about the industries as they relate to Corning anyway.’
On the other hand, she practices a hands-off policy, since she is firm that she’s the spokesperson for Corning Incorporated, not for the ventures. ‘Part of our success in joint ventures has been letting these companies stand alone, so I don’t spend a lot of time specifically explaining what’s going on in them.’
She admits that analysts do sometimes press for dismantling in their preference for pure plays. ‘But from our standpoint it’s not that complex – or we wouldn’t be able to do it. And in the end they know we have a long tradition of being successful with these ventures, that Corning’s strength is in technology, and we often enter into these ventures for market access. It’s part of achieving our long-term growth goals that we enter into them.’
Two hats
Harbison observes that there are few companies that can manage both alliances and acquisitions successfully. One that can is Cisco Systems. The alliances allow it to expand and consolidate its sales and services since, as he points out, fast growing as Cisco is, ‘it can’t acquire everything.’
Cisco’s product lines are not usually on sale on Main Street, but as the builder of the infrastructure for e-street, Cisco’s corporate customer base and its partnerships overlap. Mary Thurber, IRO for Cisco, claims that partnership goes even deeper. ‘We extend the concept of partnership. I spend quite a bit of time with our customers in regards to their IR – we share best practices with them and I think that our IR-customer partnership practice is unique.’
She suspects that most analysts have a bias against partnerships until they are proven. ‘However, we have had very successful partnerships. A company has to have a unique culture of communication and a willingness to compromise in order to make partnerships work well.’ Of course analysts need and want more, ‘So we have to provide updates on how the partnerships are doing.’ Even so, the results of partnerships ‘are expressed qualitatively since by mutual decision with our partners we don’t provide many specific numbers about this aspect of our business.’
Pfizer is at the sharp end of pharmaceuticals, and IRO Jim Gardner explains that alliances help keep it there. ‘The key thing is we’ve had a lot of success and experience with them. It ties into our vision of the future, that as we moved to the fore of the industry, it was going to become much more a network of relationships clustered around major companies than it has been in the past.’
Gardner is taken aback when asked how to conduct IR for such a network – it’s almost like asking him to describe how to ride a bicycle. ‘I think the essence of IR for alliances comes down to one axiom and three corollaries. The axiom is – be very careful about the alliances you pick, since if they are not win-win situations, then no matter what art and science you bring to investor relations, you’ll have a difficult time.’
Gardner’s first corollary is that you need to understand and respect what everybody brings to the table. ‘The second is that you need to think together and be ready for issues that may arise. You should have thought of them and incorporated them in operations before they become crises,’ he says. ‘The third is that if the others work well, if you do have to issue a communication of any substance, then make sure that it’s really coordinated so you speak with one voice.’ Gardner qualifies this, however, ‘Again, that’s easier said than done, since the partners may have different needs, but it should be ironed out before, so you’re both reading from the same sheet of music. ‘
Pfizer is covered by over 50 analysts on a regular basis, and Gardner claims that while they’re intelligent and thoughtful, they do like a story to be as simple as possible, so that they can communicate to their audiences. ‘Our experience is that analysts can understand the complexities if you take the time to explain them to the degree that you can.’
To help them, Pfizer releases specifically differentiate between alliance-generated and Pfizer-developed product revenues. ‘And then we break out sales numbers for each of the alliance-developed products.’ In fact, alliances are so much part of the Pfizer business prescription that the company’s management scheme rates personnel on their ability to interact and to manage partnerships.
Flying high
Airbus, one of the world’s most successful brands, has been produced by three companies in three separate countries: Dasa, owned by DaimlerChrysler, Aerospatiale Matra and British Aerospace, each of which has its own national standards of accountancy. Dasa and Aerospatiale are currently in the process of merging.
Andy Wrathall, BAe’s IRO, admits the numbers occasionally fly on a wing and prayer (BAe makes the wings). ‘It is quite tricky; analysts have to piece together several slightly different pieces of information, so one does have to help them a lot.’
Wrathall says there’s a tendency to want a complete ability to monitor all communications with the investment community. ‘However, this is not going to be realistic or sensible, with the partners each having their own style. But trying to get it in a consistent form for the analysts to assimilate is really quite tricky.’ Indeed, he admits, ‘I don’t think that it’s yet a proven art. I think we are still finding our way. In the end, his recipe is to ‘accept and have confidence in the partnership, that everyone is doing IR in their own way.’
To some extent, it has worked. Sandy Morris, a securities analyst with ABN Amro, contrasts the initial failure of Airbus Industrie to communicate on an IR level the manifest success of its various engineers in getting their act and the aircraft together. ‘They do it a lot better now – the partners, even apart from merging with each other, seem to be getting along fine.’
In contrast, Morris describes the early days of IR at Airbus as ‘farcical’. He contrasts, even now, BAe’s ‘belt and braces’ attitude, which means they only announce faits accomplis, with Dasa and Aerospatiale Matra’s ‘convoluted and complex’ merger announcement which, he suggests, implies that if everyone’s prayers are answered, then the loose ends may be tied up by next summer.
Morris chuckles as he remembers, ‘The only one of the partners who used to give the Airbus Industrie figures was Dasa, not even Daimler-Chrysler, but tucked away in the DASA report. Even the financial controller of Airbus Industrie did not know where they got the figure from, so we didn’t know whether it was produced with different accounting standards or exchange rates.’
Things have improved and the figures from the other partners now match perfectly those coming from BAe. ‘If you think of the apparent barriers and tensions and frictions that manifested themselves in the investor relations side, it highlights just how successful the engineers have been,’ concludes Morris.
Cooperatition
No-one (apart perhaps from Boeing) has really questioned the fundamental assumptions of the Airbus consortium. IBM’s recent strategy of partnerships, including its major deal with Cisco, have led to Forbes and others questioning the company’s corporate sanity. ‘Cooperatition,’ was one description for its recent predilection for allying with those who should be its commercial enemies.
Harbison points out that even in this age of mega deals, you don’t go around buying up companies like IBM. Lou Gerstner’s strategic plan is based upon ‘vertical disintegration,’ which he compares to the auto companies that began outsourcing their components. In their case it was because they had what Harbison calls a ‘life threatening experience.’
In IBM’s case, Gerstner’s version means if you don’t have the lion’s share of a market for a product then it’s counterproductive to forgo component sales to others. The partnership to sell components and technology to Dell for personal computers is worth $8 bn, and makes a lot of sense for a company that, almost since it invented the PC, has seen its market share steadily decline.
Hervey Parke, IBM’s veteran IRO, has always faced analysts with cookie-cutter definitions and has been in the forefront of Gerstner’s attempt to reposition the company as a technology play, despite its large size. Apart from acquisition, he says, ‘The other way is to try to get groups of companies to work together. Getting companies to work together to form these solutions when they are independent bodies is very hard. It’s hard enough between different sectors in IBM when we’re all working for the same company, but with different companies it’s very complex. The issue for IBM is to leverage the notion that from the customers’ perspective, the whole is greater than the sum of the parts.’
Parke says IBM’s growth will be driven by services, software and the sale of base technology. And our alliances are in the context of e-business which we see as a key driver of IT spending,’ Parke continues. ‘The market has associated value first with IT companies, services and software companies, then technology companies, then traditional hardware systems, servers and storage devices. IBM has been refocusing and working with customers to help them with solutions so we’ve been emphasizing our core skills, the services, and the software, which we’ve enhanced partly by acquisition and partly by porting our own technology onto non-IBM platforms.’
It caused some dissent in IBM’s own ranks when the company sold its hardware to Dell. ‘As far as the segment reporting goes, we’re not making money in the PC business,’ Parke reports. ‘Dell is making a wonderful job of making money. And it was an opportunity to compete with Dell on the end product because while we do well on some of the things on the end product, and they do some things better than us, we have a number of initiatives to make our PC business more competitive.’
As well as sales dollars, the other justification used for analysts, many of whom expected and wanted Gerstner to dismantle IBM, is the idea that the deals introduce market disciplines to company sectors which previously only had internal markets. ‘Generally speaking, the investment community thinks it’s a good move,’ Parke concludes. ‘There’s a growth message which is something that investors tend to want to hear about, and it’s one that doesn’t involve making significant incremental investments, which is something else they tend to like as well.’
Harbison ponders an IR formula that meets the different alliance contingencies. ‘If I were an IRO trying to put it in the most positive light, or to explain a specific transaction, then repeating the numbers about the overall returns of alliances is not really germane. What they need to do is take their version and put it in the context that this is an opportunity to leverage each other’s capabilities without making an incremental investment.’ Only then, after the specifics, should you reinforce it with the overall pattern that there are thousands of companies that do these kinds of alliances. However, Parke chuckles ominously, ‘If this is the first alliance a company has done, then the IR department had better have their fingers crossed.’
