Businesses Engaged in the \'Transfer

Businesses engaged in the 'transfer process must be careful in application of Western benchmarking criteria relating to performance, therefore the soft budget constraints imposed on local firms and their resultant excessive gearing through lending facilitated by local authorities looks a recipe for disaster when Western financial liquidity ratios are applied'. The characteristics pertaining to the entrepreneurial environment are molded by the processes of management at the local level. In this regard, the local government has experienced different issues i.e. 'fixing rates of taxation and finance but with substantial freedom' (Allan, 2003).

Alliance is explained as the coordination between two or more competent companies. It is believed that horizontal alliance will create negative impact on the competitive situation in the market, 'they frequently run afoul of regulatory officials' (Yang, 2005). The degree of concentration is on rise due to the horizontal alliances. Considering an example of Staples Inc., a retailer of office supplies acquired Office Depot i.e. giant retailer of office supplies as well. It was believed that the alliance will reduce the number of superstore competitors, as Staples will be the only product available in the market. The company's pricing data revealed that the Staples planned to establish their monopoly, and wanted to increase the prices of their product 13% after the alliance. The alliance was therefore criticized and blocked by the trading regulatory organizations, this saved 'consumers an estimated $1.1 billion over five years' (Yang, 2005), which otherwise would have been spent towards high prices.

The acquisition and alliance of the supplier with the reseller is regarded as vertical alliance. In the case of vertical alliance, both the parties are involved in buyer-seller relationship. The acquisition of the Medico Container Services by Merck is regarded as vertical alliance. The regulatory authorities have appreciated exercises of vertical alliances. It is expected that consumers are also able to benefit from the vertical alliances, because such activities i.e. The integration of the supply chain, increase the efficiencies, the prices stabilize and quality of the services also improve. The alliance of the Time Warner Inc. And Turner Corp., which are entirely different entertainment networks, has improved the services of the entertainment giants greatly. The regulatory authorities expressed their concerns that Time Warner after alliance will be reluctant to offer and sell its video programs to other competitors of the cable TV companies, and Turner Corp. will have extra benefit through such bargains of alliance, and Turner Corp. will be offered programming right at discriminatory rates, therefore both the companies will establish their monopolies against other competitors including Direct Broadcast Satellite and new wireless cable technologies. The regulatory authority also feared that the alliance will affect competition in the production of video programming; the alliance will allow Time-Turner to refuse the services of transmission by competitors. The regulatory authority therefore approved the alliance as it was likely to improve the services, but ' Direct Broadcast Satellite and new wireless cable technologies' (Yang, 2005).

R&D Alliances

The Corporate Diversification has been discussed in detail by the financial economists, the analysts are of the opinion that corporate diversification has lesser degree of favorable impact in judging the benefits of diversification for different reasons. The primary reason is that 'any diversification possibilities that corporations might have, will, in a perfect capital market, already have been exhausted through shareholders' individual portfolio choices' (Yang, 2005). The secondary reason is that the diversification discount i.e. The diversified corporations have the privilege to trade at discounted rates as compare to their non-diversified counterparts. It has been therefore concluded that corporate diversification is neutral, but has the potential to damage strategy. Surprisingly, the corporate diversification has been strong practice, 'At face value, diversification can be explained by the fact that when pooling income streams that are less than perfectly positively correlated, the resulting income stream is less volatile than were the constituent income streams' (Yang, 2005). The dilution of the risk factor therefore has the potential to be beneficial. The critics of the corporate diversification are of the opinion that any reduction that can be achieved through diversification, by any of the firm, 'can be replicated by the individual shareholders through an appropriately chosen portfolio'. The shareholders are expected to achieve more through cheap and economical diversification, as compare to the firm. It is believed that diversification reduced the exposure of the shareholders towards risk, therefore diversification is beneficial for the shareholders, 'the view of diversification as a means to decrease the exposure to the risk of shareholders is unnecessarily narrow in that corporate diversification and the resulting decrease in risk factor could increase the combined entity's debt capacity' (Montgomery, 1994). The major concern towards the debt capacity motive has been that it has suffered from drawbacks of the similar nature based on pure risk reduction motive. However, in perfectly functioning capital markets, the access to the credit for the firms is constrained and limited by the value of the project, therefore 'under the same conditions where the diversification neutrality result has bite, increasing debt capacity through diversification should not be a concern in the first place' (Yang, 2005). The important feature of the alliance and acquisition features has been its resemblance with the business cycle, the alliance and acquisition activities are positively related to the industrial output, business incorporations and further based on the reduction in interest rates. It has been examined that alliance activity is positively related to easing of financing constraints. The increase in the alliance activity is also based on the increase in the in collateral values (Schelling, 2000). Economists have proposed that reorganization possibilities due to the advent of technology have created focus of the corporate towards alliance and acquisition of corporate. Furthermore, overvaluation is also responsible for the increase in the alliance activity. In certain cases the economy which has poorly capitalized firms, seek assistance through financial intermediaries to that funds for particular project can be increased. The alliance or acquisition of unrelated firm is also expected to boost the debt capacity of the corporate. 'This means that the equilibrium extent of alliance activity is a function of the amount of funds available from financial intermediaries. In equilibrium, when intermediary capital is plentiful, more firms will become active in the economy, many of them becoming so by forming conglomerates' (Montgomery, 1994).

In recent past American companies experienced full-blown alliance mania, for last decade, every year has experienced greater level of alliance and acquisition activities. Although the market has experienced the negative fallout of the alliance activities, the companies and shareholders have suffered tremendous economical blow than expected, however the current corporate sector has completely ignored such facts and has planned further alliances in the years to come, the conglomerate deals of the 1960s and 1970s which was responsible for the emergence of the non-profitable companies including ITT Corp. And Litton Industries 'have been thoroughly discredited, and most of these behemoths have been broken up' (Tirole, 2005). In October 1989, the bankers fail to raise the funds for the 'ill-conceived buyout' of UAL Corp., the deal later collapsed and was responsible for causing severe blow to the stock market. The successful experience of the alliances started when Chemical Bank Corp. And Manufactures Hanover Corp. planned to alliance their finances and services, in 1991 both the corporate agreed to join in a $2.3 billion stock swap, the alliance was responsible for the establishment of the second largest banking company in America, after the alliance the corporate was able to produce $650 million in annual expense savings by the end of 1994. Once the alliance exercises turned profitable, it was regarded that, 'this was to be the era of strategic deals, friendly, intelligent, and relatively debt-free transactions done mostly as stock swaps, which were supposed to enrich share holders by producing synergies in which two plus two equals five or more' (Montgomery, 1994).

Dramatic Shift from Equity-Based Partnerships

It is further evident that the loans which appear in the balance sheet are 'tantamount to local authority equity', provided that the behavior of the authorities is precise and clear. In situations where close association exists between the authorities and the enterprises, such coordination provide the parties with relatively better understanding over western banker to decide over the issues pertaining to the future of the companies 'based on assessments of intangible assets'. It has been observed that the enterprises are assessed on western standards, ignoring the fundamentals of practices and behaviors.

The diversification of the stock portfolio is responsible for the reduction in the risk, as it minimizes the potential loss from any single stock. The observation is applicable in cases of alliances and acquisition, if the 'companies treated the businesses they acquire as investors treat stocks' (Montgomery, 1994), the failure to do so will lead towards the increase in the threshold of risk factor, in some of the cases the diversification of the business is considered to be risky activity. It is because the companies diversify on marginal basis, it is impossible for any of the corporate to diversify broadly and offer the sought-for security (Gibb, 2000). In contrast with the mutual funds, 'Mutual funds trade hundreds of stocks in many unrelated industries, with very little of the total portfolio in any single stock. By contrast, when a company expands into a new area, its portfolio consists of two stocks, typically 90% in the core operation and 10% in the new businesses' (Tirole, 2005). The diversification in majority of the cases is responsible for lower return and maximal risk factor. Researchers have observed that there is possibility of higher failure rates and lower returns for unrelated acquisitions than for related acquisitions. When the company acquires businesses in their own industry, it is observed that lowest failure rates and highest returns phenomenon occur. The reason why the diversification into unrelated business is considered to be risky is that the corporate is unfamiliar about the industry itself, and therefore the corporate is likely to overlook critical risk factors during due diligence. The corporate is expected to pay more towards the acquisition of strange industry, and will experience trouble to monitor the performance of the new acquisition. It is therefore important that the company conduct the process of due diligence in comprehensive and thorough manner, and the entire proceedings should be flawless. Often the company has appointed non-technical and irrelevant people to monitor the task force, and different departments after the alliances, such appointments will affect the performance and growth of the business, and therefore the shareholder's investment is expected to be at stake. Diversification is popular and common practice in the American market. The responsibility of the manager is to increase the wealth of the shareholders, and therefore if the diversification efforts are consistent it is expected that the shareholders will be able to benefit (David, 2002).

It is expected that the diversification of the firms is responsible for the growth of sales i.e. To be considered less vulnerable to the business conditions, therefore the diluting volatility will support and enhance the performance and initiatives of the management, and it is expected that ultimately the shareholder will enjoy the benefits of such efforts. Diversification is responsible for the diminishing the volatility of the profits, and therefore the expected profit remain consistent. Diversification also have an impact size of the firms, the size of the firm is expected to increase after it diversify through acquisition of other firms, and it is believed that such acquisitions offer hidden payoffs to the top management on the basis of the company's size and magnitude. It is not always necessary that the diversification is profitable for the shareholder. There is no difference 'between the diversification of the portfolio of shares and diversification by the firms, and the shareholders' (Tirole, 2005) investment is at risk. Considering the example of developing countries, the steel company has diversified its operation into telecommunication, and therefore there is equivalent portfolio of shares in telecommunication and steel company separately. Therefore the diversification carried through portfolio is proper course to lower the volatility in a diversified firm, 'this alternative is readily available to the owners directly, and hence managers do not add value by doing firm-diversification if the only gain is a reduction in the risk factor of profits and sales'. The firm diversification is not responsible for the addition of value, rather it reduce the value, the reason because alliance activities are considered to be expensive, and therefore it require great deal of managerial efforts for the execution of an exercise centered at entrance into a new industry, also 'buying out an existing company in the target industry but assimilating the taken-over company is still an onerous and time consuming task where failures are not uncommon' (Tirole, 2005).

Trend for R&D Alliance

It is argued that the degree of diversification is the measure for the size of benefits likely to be achieved by the shareholders. The small benefit is achieved by the shareholder involved in the diversified project; therefore such investors are poorly inclined towards IPO of such diversified firms. The reduction in the likelihood of an IPO is linked with the increase in the degree of diversification, therefore IPO is mainly preferred by such investors who are strange to diversified companies, and as such investors have the potential to make profit from diversification of their portfolios. The firm is likely to go public if the stakeholders are diversified, and possess equal shares. The banks are likely to avail the opportunity for the increasing the value of deposits insurance, therefore, 'an acquisition policy designed to maximize the value of deposit insurance may be shareholder-wealth maximizing if an increase in the value of deposit insurance increase shareholder wealth'. It was believed that the possibility that banks seek to become larger to increase the probability is possible provided that the FDIC will cover 100% of the bank's deposits, the "deposit insurance put-option-enhancing" hypothesis predicts the pursuance of the growth under social suboptimal conditions, the alliances of banks equity also improve the pursuance of growth in terms of increase in salary, perquisites, and personal prestige. The deposit-insurance hypothesis is based on the assumption that the 'acquirers would be willing to pay more for riskier, more profitable organizations whose returns are highly correlated with the acquirer's returns' (William, 2005).

The managerial-interest hypothesis is constant and consistent, and has no relationship with purchase price and exposed risk. It is expected that corporate in particular banks through maximizing risk fail to maximize the shareholder wealth; it is because the regulatory will defy any such risk exposure associated with funding of shareholders, and also in the case of failure the expected loss will be greater than the deposit insurance. Therefore the wealth of the shareholder can be increased through alliances that diversify earnings. The earnings diversification hypothesis is based on the fact that higher levels of cash flow for the same level of total risk can be achieved through acquiring banks i.e. seek earnings diversification, 'the reductions in business risk are offset by increases in financial risk'. The analysts are of the opinion that acquisition of firms can offset the reduction in equity value, which can be achieved through issuance of additional debt; such measures diminish the probability level of bankruptcy to the previous level, there have been strong evidence that leverage is increased as a result of alliances and acquisitions between the non-financial firms. It has been observed that banks acquired by bank holding companies have reduced their capital ratios after acquisitions, and reduction has been incorporated at significant level, 'the increased leverage increases the tax shield due to debt and, hence, after-tax net cash flow' (Tirole, 2005). The acquired banks reduce their holdings of low-risk securities to a greater level, and also improve their holdings of loans, this correspondingly increase the earnings (Karl, 1999).

Features and Disadvantage of Joint Venture

The revenue enhancement and cost cuttings are the major reason behind alliances and acquisition activities. The exploitation of the potential costs and revenue is achieved through alliance activities, in 1996, the alliance of Chase Manhattan and Chemical Bank created largest banking organization in U.S.A, the assets of the company after alliance stood at $300 billion, it was reported that the alliance was responsible for the annual savings of more than $1.5 billion, which was achieved through 'consolidation of certain operations and elimination of redundant costs' (Tirole, 2005) which was based on the removal of 12,000 positions from combined staff of 75,000. The alliance was responsible for expansion of the operations, and the corporate had its branches in more than 39 states of American, and was present in another 5 countries across the world. The Ban cone purchased First Chicago in 1998 for $30 billion; the acquisition was responsible for the annual cost savings of more than $930 million, additional $275million was saved through integration of credit card and other retail and commercial services. The Firstar acquired Bancorp for $18.7 billion in late 2000, it was expected that the alliance will reduce the expenses by $206 million on annual basis. The acquisition of Summit Bancorp by Fleet Financial's for $7 billion in 2001 was responsible for the annual savings of $275 million.

It is expected that acquisition of the bank is likely to increase the revenues in the growing market. The alliance of J.P-Morgan and Chase Manhattan in 2000, and the establishment of J.P-Morgan-Chase was responsible for cost savings of $1.5 billion; the alliance was performed to increase the revenue growth. The alliance combined 'J.P. Morgan's greater array of products with Chase's broad client base, the alliance added substantially to many businesses such as equity underwriting, equity derivatives, and asset management', which previously both the firms failed to launch in a comprehensive manner individually, both the corporate mutually were able to develop their own presence through deals, and were able to achieve presence in Europe, 'where investment and corporate banking were fast growing businesses' (Tirole, 2005). The assets and liability portfolio of the institution offer different credit, interest rate, and liquidity risk characteristics which is based on the stability of the acquisition of the bank's revenue stream. Considering the example of real estate, in 1980's the real estate value of the Southeast American region declined, and was lower than the worth of the Northeast. Therefore the availability of the geographically diversified real estate portfolio produced a stable revenue stream. The revenue enhancement can be achieved through adoption of investment and expansion activities in areas that offer mediocre level of opportunities less compare with the fully competitive avenue.