Our survey reveals that working with your direct competitors may be the answer to future growth
A tried and tested way of achieving growth is to simply buy out the competition. Sharing knowledge and expertise has, for the most part, been seen as counterintuitive, but that is changing. Many fast-growing AMT businesses are embracing a wide range of alliances as they seek to develop rewarding new partnerships.
In many cases, these types of agreement are regarded as preferable to M&A. Alliances and joint ventures are a means of entering new markets and gaining access to technology and new tools, while at the same time reducing risk.
In a sector where businesses are constantly being asked to make new bets on emerging technologies or new types of business model, these less formal arrangements allow firms to experiment and spread their net wide, without committing to a full-blown deal. In many cases, the alliance will eventually lead to M&A, whereas in other instances one side or another may back out of the partnership or let it reach its natural conclusion.
Minority stakes are increasingly popular with fast-growing AMT businesses, with almost nine in 10 (89%) having invested in this way over the past three years – this is higher than in any other individual sector and across all sectors as a whole. In some cases, these minority stakes can take the form of corporate venture capital (CVC), a type of collaborative investment which has seen a sharp rise in the past few years. Indeed, according to the 2017 CB Insights Corporate Venture Capital Report, the number of new CVC firms making first-time investments reached 186 in 2017 – a new record.
Taking a stake in another business through this route may provide much-needed access to new technology or talent, while still allowing the target to maintain its independence. This may be important where, for example, the cultures of the two businesses are very different: there are numerous examples of large businesses buying smaller ones but failing to successfully integrate the acquisition because of a culture clash.
Minority stakes do, however, carry certain risks. The buyer has little or no control over the company in which it is investing. That could even leave it open to reputational or regulatory damage in the event that the smaller business behaves irresponsibly. It may also be difficult to divest a minority stake.
Other types of collaboration – licensing/franchising (60%) and joint ventures (58%) – are also popular. However, no matter what the structure of the alliance, the key to success is for both parties to agree at the outset what they want from their partnership – and how they will work together to achieve those objectives.