Ahead of the Curve: Consider Alternative Structures

(Charlotte, NC – December 11, 2018)

The current M&A environment of low interest rates, high leverage levels, and high multiples has increased competition between corporate and private equity buyers and, in some cases, caused corporate buyers to shy away from competitive processes altogether. While acquisitions can and should be an important tool to generate growth for any organization, considering alternative structures should also be a critical step when pursuing inorganic growth. Our last newsletter discussed joint ventures as one example of an alternative to M&A. This aim of this newsletter is to illustrate the potential benefits of strategic alliances.

A strategic alliance is less involved and less permanent than a joint venture. But, partnering companies can gain processing efficiencies, entry into new markets, or access to new technologies all while maintaining autonomy and without contributing assets or capital.

One type of strategic alliance is a virtual joint venture. This is a collaborative arrangement that is formed via contractual arrangements to manage governance and oversight and to provide a mechanism for risk and reward allocations. Each party is able to maintain contractual rights to underlying IP. Payments between parties can be structured based on milestones, material costs, or royalties. These types of alliances are most common in the pharmaceutical, biotechnology, entertainment, and technology industries.

Another form of strategic alliance is a long-term contract. This is an agreement whereby one company partners with another for a specific task over a specified term. These agreements include pay-to-play provisions and price adjustments based on volume, increased costs, changes in market conditions, or other factors. Long-term contracts are most common in the automotive, aerospace and defense, and construction industries.

While these are only two examples of alternative structures to M&A, they should be considered along with the Company’s strategy when considering both organic and inorganic growth.

PwC: Joint Ventures and Strategic Alliances

“North Inlet Advisors, LLC” provides financial advice to companies on capital formation, mergers, acquisitions, divestitures, restructurings, and other complex corporate transactions. North Inlet Advisors is not a retail broker-dealer, does not conduct underwriting activities, provide research, analyst reports, or solicit or carry accounts, or offer or sell securities products to retail customers. North Inlet Advisors is registered as a broker-dealer with the U.S. Securities and Exchange Commission (“SEC”) and is a member of the Financial Industry Regulatory Authority (“FINRA”) and Securities Investor Protection Corporation (“SIPC”). Please visit www.finra.org and www.sipc.org, or North Inlet’s regulatory webpage for more information.