When Michael Jordan decided it was time to start an apparel company that would help him make a smooth transition from the basketball court into retirement, he got a little help from his friends at Nike Inc. Jordan recently announced he’ll start a new Nike division and run it himself.
When McDonald’s Corp. needed a Happy Meal home run, it turned to Ty Inc., maker of Beanie Babies, a deal that exploded into the hamburger giant’s most successful Happy Meal promotion in history.
More than ever before, companies are teaming up in relationships that range from full-blown marriages to casual alliances. Joining forces can help two similarly sized companies go after bigger contracts than they would on their own. Teaming up can also work when a small company can offer a service efficiently to a bigger firm.
But partnerships in business, like those in life, can end bitterly and the business breakups can scar a career irrevocably.
How to make sure your alliance doesn’t become a dangerous liaison? Get written agreements on even the smallest jobs, triple check cost estimates, have a clear idea of what you’re bringing to the table and remember your new teammate may also be a competitor.
“The track record on mergers and acquisitions is that about 70 percent don’t work, and that strategic alliances are no better,” says Robert Duboff, a vice president with Mercer Management Consulting Inc. in Boston. The New York-based firm just completed a study of 270 mergers that found nearly half of the merger transactions in the 1990s have not generated shareholder value equal to or better than their industry average. “It’s fine when everyone is putting in and getting the same, but more often that’s not the rule. The good agreements have players that are roughly the same size and share some commonality of culture.”
Despite the pitfalls, alliances are gaining favor as companies and government agencies consolidate the number of contracts they work with to focus on
fewer, large suppliers, says Hedy Ratner, co-executive director of the Women’s Business Development Center in Chicago. That leaves many small- and mid-sized businesses–many of them owned by women and minorities–out in the cold. “Companies now have to look at doing things a little differently,” Ratner says. “They have to build their capacity.”
One of the quickest ways to do that, experts say, is to team up with another company.
Patricia Gallagher founded a lighting design company in Mokena 11 years ago after selling lighting fixtures at Marshall Field’s and has built Evergreen Supply Co. into a 15-worker operation with clients including the Museum of Science & Industry. After tackling early projects on her own, Gallagher now teams up with John Foster, a South Side electrical subcontractor, to win bigger jobs like the museum contract. Her advice to companies thinking of doing business together: “Be open, and let the other company know exactly what you want.”
Another frequent problem for individuals and smaller companies doing business together, notes attorney Linda Chaplik Harris, occurs when neither party wants to kill the collaborative atmosphere by mentioning potential points of disagreement on the work. “You need to deal with legal issues upfront, while everybody is still excited,” says Harris, a partner in the corporate practice group at Sonnenschein Nath & Rosenthal, in Chicago. Agreement in writing on how much the project is worth in financial terms, what the overall strategy is and how the partnership will be dissolved is vital, she says. “When they’re enthused, people are reluctant to bring this up because it puts a negative view on it. It’s very much the same as a prenuptial agreement.”
Another point to consider before even getting to the contract stage, Harris says, is an evaluation of what each side would get out of a deal. “You have to truly understand the cost of the benefit you’re getting from the other side. If the cost is control, you have to consider if you’re comfortable with that. Mostly, you have to trust your gut to know if this is somebody you can trust.”
Mercer’s Duboff agrees, emphasizing that even small companies need to communicate the goals of the alliance to all involved because smaller ventures easily implode when a key individual on one side leaves the company. “All sides need to see the common good,” he says.
