Alfred Griffioen Financial valuation MSc, CSAP, FC of ...

Alfred Griffioen

MSc, CSAP, FC

Presentation for ASAP 16 April 2014

Financial valuation of alliances and partnerships

Alfred Griffioen

•  Specialist in business partnerships and alliances

•  Track record in marketing, business development and strategy consulting

•  Author of 2 books about alliances and competitive advantage and 1 about strategy

•  Certified Strategic Alliance Professional

•  Founding partner of Alliance experts

Alliance experts: an international network of partnership specialists

Collabora'on strategy & Market research

Interna'onal matchmaking

Nego'a'ons & Partnering agreements

Benchmarks & Training

Agenda

1.  Introduction

2.  Traditional company valuation

3.  Information alliances

4.  Three ways to valuate a partnership

5.  Roles in alliance management and their impact on value

The importance of alliance management

•  Alliances can add direct value to a company

•  On the other hand, partnerships frequently tend to fail

Poor$or$damaged$

rela+onship$40%$

Poor$strategy$or$business$plan$$46%$

Bad$legal$and$financial$terms$

14%$

0%#1%#2%#3%#

4%#

5%#

6%#

7%#

8%#

Exper1se#alliances# New#

business#alliances#

M&A#like#alliances#

7.7%#

1.3%#

0.7%#

Market response to alliance announcement

Source: BCG research Source: Vantage partners

Why financial metrics are important

•  Practically every company is driven by return on investment

•  This makes the CFO in most cases the second-in-command

•  If you can’t show what the added value is of an alliance, why should a company invest in it?

www.allianceexperts.com 6

Agenda

1.  Introduction





Traditional company valuation

•  In most cases the discounted cash flow method is used

•  The value of a company then is:

•  However, as it is difficult to predict the future cash flows, the average normalised cash flow of the last three years is taken

•  Interest and risk factor normally add up to 10 to 15%. Calculating the formula for an infinite number of years will result in around 4 to 6 times the normalised cash flow

cashflow in year x

(1 + interest + risk factor)xx=0

∞

∑

Results from the past do not give any guarantee for the future

•  What happened to Nokia, Ahold, Enron or Microsoft?

•  In three years time, more than half of the critical staff will have changed jobs

•  New technologies make older business models obsolete

Like Darwin said: the companies that can adept best to changing market circumstances, will be the companies that survive


Agenda

1.  Introduction





The value chain relies heavily on information

•  The value chain is not linear any more but has shortcuts, twists and bends

•  Value chains and related production costs are heavily impacted by product design and the application of the right production technologies

•  Information about (end) customer needs is dissipated through the chain very slowly


Creating exclusive partnerships sets an incentive on information sharing

•  Information sharing takes time of key employees

•  Traditional sales or purchasing behaviour is mainly filtering of information

•  Only with a joint goal and the right contractual setting companies start to share about customer needs, leads and experiences.


Carefully create your alliance portfolio


Direct value and cash flow

big

small

small big

Contribu'on to the company mission and innova'on

Core ac'vi'es

Oppor-‐ tunis'c

Innova'on porKolio extension

Agenda

1.  Introduction





According to IFRS-11

•  The core principle of IFRS 11 is that a party to a joint arrangement determines the type of joint arrangement in which it is involved by assessing its rights and obligations and accounts for those rights and obligations in accordance with that type of joint arrangement. [IFRS 11:1-2]

•  Two types: joint operations or joint venture

•  Procedure:

–  Check for ‘Control’

–  Check for ‘Joint Control’

–  Check for ‘Significant Influence’

•  Outcome can range from (partial) consolidation to classification as just ‘a financial instrument’


The cost savings methodology

•  Partnerships save on investments and operational costs

•  Examples:

–  Choosing for a franchise concept over opening own outlets

–  Sharing investments for instruments that are hardly used

–  Joint product development

•  Cost savings can easily be calculated and should only be corrected for income sharing


The discounted cash flow method (revisited)

•  The value of an enterprise is:

•  The value of an alliance is:

•  But typically:

–  The duration of the alliance can be limited

–  The initial investment is much lower

–  The risk factor is higher

–  Your share will be between 30 and 70% of the profits

your share ×cashflow in year x


n

∑

cashflow in year x


∞

∑

Investments for market entry through a partnership will be lower

•  Your distribution partner will already have the economy of scale in his sales force or logistic network

•  Your partner (if selected properly) has a known brand name and credibility, which allows the partnership to ask a premium price

•  Your investment will mainly be in small adaptions to the product (e.g. translations) and product support

The risk factor is higher

•  Shared ownership means less flexibility in decision making: this is a risk in itself for quick adaption to market conditions

•  Having a shareholder’s agreement or other collaboration agreement also means restrictions in divestments or changes in strategy

•  There always is the risk of opportunistic behavior of the partner

On the other hand:

•  Especially in less developed countries or countries you’re not familiar with, working with a service provider or agent also brings risks.

You will have to share your profits


There are three ways to enhance your share in the alliance

•  To make your offering more attractive

–  Better adjusted to the new market

–  Partly do your own branding and advertisement

•  To become more attractive as a partner yourself

–  Improving the ease to work with you

–  Profiling yourself in a more attractive way

•  To take the initiative in partnering

–  This also enhances the chance of ending up with the best partner

Game theory shows that it’s favourable to involve other companies one by one

A

B

C

A

B

C

First A and B, then C A, B and C simultaneously

1 2

3

Agenda

1.  Introduction





Roles in alliance management

Hinterhuber (2002) distinguishes four types of network orchestrator roles:

•  Architect:

–  Defines the objectives of the network

–  Decides who becomes a member of the network

•  Judge

–  Defines and maintains performance standards

•  Developer

–  Creates new concepts and intellectual assets

•  Leader

–  Motivates partner firms and creates network identity


Each role has a specific influence on value


Architect Developer Judge Leader

Has influence on the split of shares

Influences the life span of the network

Influences the investments Reduces risks in

the collabora'on

your share ×cashflow in year x


n

∑

Conclusions

•  We need to rethink how we valuate companies, the real value moves from assets to exclusive collaborations

•  Choose your collaborations carefully and balance your involvement

•  The architect role is the most strategic one, but also other roles need to be taken care of

•  Proper alliance management increases both the pie and your share of it!

Questions or comments: [email protected]


Alfred Griffioen Financial valuation MSc, CSAP, FC of ...

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