Opening Case essay
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As companies embrace the need for growth, larger market shares and survival, they get into partnerships to take advantage of their combined absolute advantages. These partnerships, known as strategic alliances, are agreements between two or more organizations to pursue a certain set of goals to meet a critical business need. They include joint ventures, mergers and acquisitions.
A joint Venture is a form of strategic alliance where two or more independent companies create a legally independent company to share some of their resources and capabilities to gain a competitive advantage. In 1996, Groupe Danone, a French food-products company and China’s Wahaha Group created five joint ventures. These joint ventures were established to take advantage of benefits strategic alliances. As such, they were both able to substantially reduce the cost of undertaking a new venture by sharing the cost. For Danone, the alliance reduced the risk and uncertainties usually occasioned by entering a new market by using a player who was already vastly experienced in that market. The alliance also gave Danone the opportunity to increase its global market share.
Although the two companies sought to share some of their resources and unique advantages, they did not intend to merge and become one company. As a result, they chose to get into a joint venture because, unlike mergers and acquisitions, it created a company that was legally independent from the two parent companies. This meant that the parent companies could still continue with their pre-existing businesses or get into others without needing to consult the partner. For example, Danone bought stakes in other Chinese food and dairy- products companies.
In the decade following the creation of the alliance, Wahaha Group pursued aggressive growth. By 2006, they controlled seventy subsidiary companies in China that used the “Wahaha” brand name. Only thirty nine of these were joint ventures with Danone. This created a string of events that would eventually lead to the divorce of the two companies.
Following a jump in the profits of the subsidiary companies by 48%, Danone wanted to have total control of the “Wahaha” brand by buying the remaining thirty one subsidiaries. This proposal was however rejected by Wahaha Group citing, among other things, undervaluation. The $500 million offered by Danone would give a price/earnings ratio lower than four. This was, according to them, lower than the ratio of about 5.4 from the book value of $700 million of the thirty one subsidiaries and profits of $130 million. Wahaha group also felt that the buyout would put the “Wahaha” brand in jeopardy since Danone could very easily phase it out and promote their global brands- Danone and Evian.
A dispute erupted between the two companies. In the master joint venture agreement, the subsidiary joint ventures were given exclusive rights to produce, distribute and sell under the “Wahaha” brand. Danone, therefore, claimed that the 31 subsidiaries were illegally using the “Wahaha” brand and other facilities of the master joint venture to sell their products.
In their response, Wahaha Group claimed that the agreement to grant the exclusive rights was never approved by the Chinese Trademark Office and was, therefore, not in effect. They also stated that Danone only wanted to unfairly reap the fruits of Wahaha’s success in its expansion. Danone had previously no issues when Wahaha openly used the assets of the subsidiary for expansion. Wahaha further argued that it would be unfair to grant Danone the exclusive rights as they had actively invested in companies that competed with Wahaha.
The inability to resolve these issues amicably resulted in a series of public spurts, suits and counter suits. In the end, the two companies divorced though none of them regretted having created the joint venture.