The Alliance as the Best Option for TBBA Bank: Synergy Leading - Case Study Example

? Divestment, Acquisition or Alliance – Case Analysis of the Trust Bank of Britain and Asia (TBBA) Mrs. Oluwabunmi Lawal Introduction Business decisions require assessing different aspects. Mergers and acquisitions and strategic alliance are some of the decisions that require utmost attention to avoid mistakes (Dyer et al 2004). There are many aspects to consider before deciding to acquire a firm or develop a strategic alliance. Dyer et al (2004) mentioned that before collaborating in any way whether its alliance, acquisition or a merger, the company must decide on the level of uncertainty involved in these decisions. The higher the level of uncertainty (with regards to future operations of the acquired entity) indicates that the company should go for alliance rather than acquisition and vice versa. From the case analysis, it is clear that TBBA has a strong history and culture. It is a trustworthy bank that enjoys a good repute among its customers. Though TBBA has a good holding on the retail banking tasks, it is new to commodity trading. Still, the bank has several opportunities in commodity trading especially when the economic crisis has considerably reduced the profit margins from the retail and investment banking side. Richard Cheung, the newly appointed CEO of TBBA is now faced with two questions whether it should keep its commodity trading business or sell it off. In addition to this, if the bank decides to stay with this line of business, whether it is a good idea to go for alliance or acquisition. Analysis and Recommendations with regards to Selling off Commodity Trading Business Selling off a part of business is worthy when the gains are higher in liquidating than keeping that line of business. Van Horne (2002) stated that selling off a part of business to another firm is a right decision when the present value received by the selling company is higher than the expected future returns by that business. Other reasons of divestment highlighted by Kozami (2002) are persistent negative cash flows, high competition, or lack of resources. In the case of TBBA, none of the above reasons exists that makes it justifiable to divest commodity trading business. Neither commodity trading business is giving negative outcomes, nor does the company lack resources for technological upgradation or to beat competition. This makes it irrational to sell off a line which is one of the most flourishing markets and has shown great potential in Asian market of TBBA. Divestment can be a quick fix for a newly appointed CEO because he is not emotionally attached to the unit to be divested; however, for a CEO emotionally attached to a unit it is rather a difficult decision (Kozami 2002). In case of Richard, he is a part of the organization before being appointed as a CEO and he is the one who has given a unified identity to TBBA and commodity trading unit is very much a part of that identity. It is not that easy to sell it off rather it is more comfortable to invest in it especially when future expected returns are higher. Another thing that opposes the decision to divest is that the future plans of TBBA include returning to its roots. There is a great opportunity for expansion in UK because of the weak performance of rivals. TBBA is expert in areas where its rivals has failed to produce results; that is lending to small firms and commodity trading business. Entering these lines will give TBBA a visible success in UK market. Working on areas that can deliver true value to stakeholders can give a clear edge to TBBA in highly competitive and slow growing market of UK where it will be difficult to mark a huge footprint otherwise. Though selling off a business unit may lead to regain lost strategic focus (Decker 2008) however it is not a good option when the business line to be sold off promises future gains (Van Horne 2002). Instead of selling off commodity business, it is a far better idea to make it work in UK market. TBBA can take advantage of its strong balance sheet to expand its commodity trading business. But this is easy said than done because this is not the core business of TBBA. TBBA lacks technical expertise to run this line of business profitably in the face of high competition. There are many areas where inadequate knowledge can be harmful and can potentially lead to higher losses. Analysis and Recommendations with regards to Acquisition or Alliance Decisions regarding acquisition or alliance are not swift. Mergers, acquisitions and alliances are some of the most sophisticate strategic decisions. They need attention to detail to avoid mistakes that can prove to be burden on business in future. There are several aspects to consider before one could decide in favour of acquisition or alliance. Both acquisition and alliances have their own advantages and disadvantages. Alliances are good to opt for when combining complementary resources leads to value creation (Peng 2009). Acquisition is best when level of uncertainty is low; in case if uncertainty is high it is good to go for alliance (Peng 2009). In case of TBBA and Comboutique, it is desirable to combine technological, financial and human resources. This is because TBBA has capital and a strong balance sheet but it lacks required expertise to run commodity trading business. On the other hand, Comboutique has the required expertise but it lacks the technological support and required capital to expand its operations. In such a case, level of uncertainty about future operations of both Comboutique and TBBA is high and it is a good option to combine complementary resources to create value for stakeholders. This suggests alliance to be a good option to go for. Dyer et al (2004) suggest that experience in managing alliance or acquisitions affect a company’s choice. In case of lack of experience, it is good to go for a less risky option. TBBA does not have experience in managing alliance or acquisitions and is currently facing autonomy issues with its Malaysian subsidiary. This depicts that different dimensions need to be catered for in case of merger or acquisition; hence it can be said that best option for TBBA at this point of time is to go for alliance where both TBBA and Comboutique work as separate entities while collaborating on areas where there is a possibility of combining resources to achieve shared goals. Now when the decision has to be made in favour of strategic alliance it is important to decide the type of alliance; it could be equity based or non-equity based. Equity based alliance involve ownership or financial interest whereas non-equity based alliance is contractual and doesn’t involve sharing of ownership (Peng 2009). Though equity binding is long term and robust than non-equity based alliance (Pateli and Lioukas 2012) however owing to the current situation in TBBA and small size of Comboutique it is important to start with contractual agreement. Both TBBA and Comboutique can start with helping each other in areas where both are weak. Later on, they can change alliance to any option that seems more suitable based on the experience of working together. Non-equity based alliance will also help develop synergies that are required at the moment by both TBBA and Comboutique, that is, technological and capital synergies. Ang and Wu (2011) also highlighted the importance of creating value through synergy of complementary technologies at two companies deciding to work as allies. In this case, TBBA’s balance sheet is strong and it is a good opportunity to expand commodity trading business which is a profitable line of business with the help of expertise of Comboutique. As revealed from the discussion in the case, Comboutique was interested in buying the commodity trading unit of TBBA. This clearly shows that it will not be interested in acquisition by TBBA at this stage. However, Comboutique may be interested in alliance because it requires capital for technological expansion. Later on, alliance can also provide a gateway to acquisition as highlighted by Dyer et al (2004) which might not be required if alliance work well for both companies. Another fact that supports going for alliance is the current position of Comboutique. Comboutique is one of the two leading commodity brokers in the industry which makes alliance attractive for TBBA as it needs expertise. There is no other better option than Comboutique hence alliance at this stage will be quite beneficial for both companies as both need each other’s support to expand their operations. Looking at the opportunity to develop alliance with Comboutique in the light of VRIO framework, it can be said that this alliance well-fits in the resource based view propagated by VRIO. VRIO stands for value, rarity, imitability, and organisation. Value suggests that any attribute (here, alliance) must create value (Peng 2009). It should help an organisation to effectively and efficiently implement its strategies (Witcher and Chau 2010). Alliance between TBBA and Comboutique will add value to the operations of both companies. Rarity and imitability elements suggest that the attribute must be rare and unique and must be difficult to imitate. In this case, competing organisations are not found to be involved in any such alliance which makes this opportunity attractive from the perspective of competition for both TBBA and Comboutique. Organisation element suggests that the organisation must be able to harness the competitive potential of value, rarity and imitability aspects (Witcher and Chau 2010). In this case, both TBBA and Comboutique can exploit this opportunity of alliance to its fullest hence it is the best option. Conclusion Analysing all the options, alliance seems to be the best option. Divestment or acquisition seems to be inappropriate at this stage. This is because alliance best fits in the need to create synergy leading to value creation for stakeholders, reduce uncertainty and combat competition. Both the organisations can well collaborate and involve in a non-equity based alliance which can further lead to several options of collaboration for both companies. Word Count: 1646 References Ang, J. S. & Wu, C (2011). The Role of Technological Synergy in Mergers and Acquisitions. Social Science Research Network. Available: http://ssrn.com/abstract=2024805 (accessed on: 23 August 2013) Decker, C (2008). Legitimacy Needs as Drivers of Business Exit. New York: Spinger. Dyer, J., Kale, P and Singh, H (2004) ‘When to ally and when to acquire’, Harvard Business Review, 82(7/8), pp. 109-115. Kozami, A (2002). Business Policy and Strategic Management, 2nd edn. India: Tata McGraw-Hill Education. Pateli, A & Lioukas, S (2012). Antecedents to value creation and value appropriation outcomes of strategic alliance: the moderating role of governance mode. In Das, T. K (ed.), Management Dynamics in Strategic Alliances, pp. 53-72, New York: Information Age Publishing Inc. Peng, M. W (2009). Global Business. USA: Cengage Learning. Van Horne, J. C (2002). Financial Management & Policy, 12th edn. India; Pearson Education India. Witcher, B. J & Chau, V. S (2010). Strategic Management: Principles and Practice. UK: Cengage Learning EMEA. Read More