Technology sectors: addressing legal complexities in corporate alliances
As potential future business models multiply and evolve, complexity, convergence and the need for scale and speed to market are all accelerating each other. That is why one of the clearest data points to emerge from recent research by EY is the rapid growth of strategic alliances and partnerships across all three TMT (Technology Media Telecommunication) sectors. For example, partnerships soared at a 35% compound annual growth rate (CAGR) in tech, telco and M&E from 2014 through 2017 to an aggregate 527 deals (see Figure 1).
Interpreting the data, EY has seen a qualitative change in the nature of TMT partnerships. “Many past partnerships were looser affiliations,” says Clarence Mitchell, EY Global TMT Strategy Leader. “Alliances today in TMT are frequently more significant and tightly integrated. Partners are sharing data, jointly developing products and offerings, and actively building ecosystems and platforms. There is more real operational integration between partners.”
Unlike M&A, partnering resources can be adjusted up or down over time. That is critical in the current fast-changing environment, where business strategies can shift rapidly. At the same time, business certainty and clarity is vital to ensure that strategic alliances are not put under strain or even break. This can happen through misunderstanding, poor communication or misalignment of expectations.
Clarity is obtained and business certainty raised by ensuring that from the beginning the contractual documentation is properly drafted, including the mechanisms for the parties to adjust resources or make other changes to the alliance. At the same time, adjustments and changes might raise competition law issues. These must be properly addressed up-front to avoid potentially heavy fines for breach of competition law and, where necessary, competition authority consents must be obtained.
Technology-enabled disruption, business model uncertainty, record-high equity markets and cross-sector convergence are in the nature of the TMT industries today. Does anybody think the pace of change in TMT will get slower from here? At EY, we don’t think so. Instead, TMT companies can look to M&A and alliances for that missing strategic link to complete an end-to-end solution, for scale through consolidation, geographic expansion, convergence deals or the key digital transformation capabilities they need.
In relation to alliances, there has been a change from a static to a dynamic business model. The contractual documentation that defines these new forms of alliances must reflect this changing environment. Emphasis in the documentation must be given to the possibility of change, the mechanism for change and for the potential consequences for change, such as competition law regulatory issues. Care and attention to the drafting of such contracts, particularly a focus on amendment provisions is critical to avoid problems later.
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