ITPEC IP April 2022 Question 81
As a method for a company to utilize the business resources of another company, there is a corporate acquisition and a corporate alliance. Which of the following lists all and only the general demerits of a corporate alliance in comparison with a corporate acquisition?
Explanation
II only — an alliance gives only limited say over the partner's decisions; I and III are burdens of an acquisition.
In an alliance (a technology tie-up, joint development or sales, a minority capital stake) both companies stay independent. It costs little and is quick to form or dissolve, but the partner decides for itself how its resources are used, so one company's influence over them is limited. An acquisition buys control of the other company: its resources can be directed freely, at the price of a large investment and the work of integrating the acquired organization.
- •I, reforming the other company's organization or business processes: the integration work after an acquisition
- •II, limited participation in the partner's decisions: a demerit of an alliance
- •III, a large investment affecting the financial position: a demerit of an acquisition
Answer (d)
Why not others:
- •(a) I — reforming the other company's organization and processes is what an acquirer does to integrate it; alliance partners keep their own organizations
- •(b) I, II, III and (c) I, III — both add I and III, the integration effort and the large, balance-sheet-affecting investment of buying a company; an alliance needs little capital
Key rule: An acquisition gives control at a high cost and with integration effort; an alliance is cheap and flexible, but control over the partner's resources stays limited.
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