What is an alliance? The difference between alliance and M&A

1. What is an alliance?

An alliance refers to two or more independent organizations working together to achieve a specific purpose or benefit.

In business, alliances include capital alliances, business alliances, and technological alliances. This collaboration often has strategic implications beyond a simple transaction and involves a shared long-term vision.

The purpose of alliances varies but they are used as a means to increase a company's competitiveness and facilitate expansion into new markets and industries.

2. Types of alliances

The main types of alliances are:

2.1. Business alliance

A business alliance happens when multiple companies pool their management resources, such as technology and human resources, to build a cooperative system. Through business alliances, those companies can share technology and know-how and further improve their competitiveness. A business alliance is a measure of mutual development.

2.2. Capital alliance

A capital alliance is an alliance between two or more companies to create a system for cooperation in business and financial matters. Specifically, a partnership is created by each company owning each other's stock, or by one company acquiring the stock of its partner.

By acquiring shares, they will cooperate not only in terms of technology but also in terms of finance, creating a closer partnership. However, capital alliances are not M&A. In order to minimize the impact on management, it is common to keep the ratio of stock ownership to less than 1/3.

2.3. Technical alliance

A technical alliance is a type of business alliance specializing in the technical field. Specifically, these include license agreements for patents and know-how, and joint research and development agreements for new technologies and products.

2.4. Industry - academia alliance

Industry-academia collaboration refers to a collaboration between universities, other educational institutions, or research institutes, and private companies to jointly conduct new businesses for research and development purposes. The blue light-emitting diode is a famous example of the results of industry-academia alliances.

3. Differences between alliances and M&A

Both alliances and M&A are ways for companies to grow and expand but they are fundamentally different.

M&A is a process in which one company acquires the management rights of another company and is integrated into one company, whereas an alliance is a process in which one company cooperates with another company for a specific purpose while remaining independent.

In other words, the major difference is that while management rights are transferred in M&A, they are not transferred in alliances and the relationship is collaborative.

Therefore, alliances can be said to be relatively easier to dissolve than M&A but be careful that know-how and technology may be leaked.

4. Alliance benefits

The biggest advantage of an alliance is that it allows companies to share management resources and risks. When entering new markets or developing new technologies, we can significantly reduce capital and risk compared to doing it alone.

4.1. Sharing of management resources

By sharing management resources (technology, funds, human resources, etc.) between companies, operations become more efficient.

4.2. Diversification of risk

An alliance will reduce the risk that failure in one project or market will impact the entire alliance.

4.3 Faster entry to market

By collaborating with organizations already active in a given market, it is possible to lower the barriers to entry into a new market.

4.4. Complementing strengths and improving competitiveness

When organizations have different areas of expertise, they may be able to leverage each other's strengths to improve collective performance and compete against larger competitors.

It is also possible to upgrade and expand your own business by transferring knowledge and technology from your business partners. Additionally, multiple companies working together can create an advantage over the competition.

5. Alliance disadvantages

On the other hand, the disadvantages of alliances include the possibility of disagreements regarding management culture and goals. Such friction can seriously impede partnership outcomes.

There is also the risk that important information may be leaked and used by competitors.

5.1. Mismatch in purpose and vision

If the objectives and visions of the organizations forming an alliance are not aligned, friction and conflict can occur.

Also, different organizational cultures, management styles, languages, etc. can make effective communication difficult.

5.2. Risk of information leakage

Close collaboration may result in valuable information being leaked to third parties.

5.3. Operational complexity

Alliance relationships can be more complex to operate than a single organization acting alone. This can lead to increased administrative costs.

These are the general advantages and disadvantages of alliances, but depending on the specific case, other factors may also need to be considered.

6. Business terminology relating to alliance

6.1. Alliance agreement

An alliance agreement is a legal document entered into by two or more companies or organizations when they collaborate on a specific purpose or project.

This agreement specifies many aspects of the collaborative relationship, including division of roles, cost sharing, information sharing, confidentiality, and dispute resolution mechanisms. Alliance agreements are very important because they clarify the rights and responsibilities of both parties.

6.2. Alliance business

Alliance business refers to business conducted jointly by companies and organizations that have entered into alliance agreements. In addition to further developing existing businesses, alliance businesses may also involve starting new businesses. This can be seen in a variety of situations, from new product development to market development and supply chain optimization.

For example, when a car manufacturer and a battery manufacturer collaborate to develop electric vehicles, this is a type of alliance business.

6.3. Alliance partner

Alliance partners refer to organizations that work together in an alliance relationship. Alliance partners aim to achieve common objectives by leveraging their respective areas of expertise and resources.

Partnerships are often equal, but in some cases, they can also be formed between organizations with large differences in size and influence, such as between large companies and startups. By collaborating with alliance partners, sharing technology and exchanging human resources, you can expect further growth for your company.

These terms are commonly used in business and each is an important element of a successful alliance.

7. Summary

In business, it is mainly used to refer to business alliances and strategic alliances. Although M&A can be seen as having similar meanings, they are very different in terms of corporate independence.

Through alliances and M&A, you can expect to greatly accelerate your company's growth by joining forces with partners who complement your company's strengths.