Introduction
Archer Daniels Midland (ADM) is a global leader that primarily offers nutritional solutions for humans and animals. The company has been in operation for over 120 years, since its inception in 1902 (ADM, n.d.). ADM has survived by leveraging its unique model to harness nature’s power to develop, envision, and combine flavors and ingredients for food and beverages, animal feed, and supplements. The company has set its purpose on unlocking the potency of nature to augment the quality of life. ADM has five broad product and service offerings: human nutrition, animal nutrition, pet nutrition, industrial biosolutions, and services.
Human nutrition is centered on the company’s ability to enhance innovation beyond the ingredients, providing stimulating food solutions. ADM applies holistic formulation expertise and technical inventiveness to develop winning products for human consumption. In animal nutrition, ADM develops custom-made premix formulations and complete animal feed using amino acids, feed additives, and other ingredients.
The company can offer a range of vital, value-added solutions and services. Pet nutrition involves creating innovative solutions arrived at by linking end-user needs with forward-thinking knowledge to unlock growth. ADM develops industrial biosolutions focused on plant-based feedstocks. ADM has developed a novel platform that enables product development engineers to use formulators to enhance petrochemical ingredients by increasing the plant-based content in the final product formulations while upholding or refining performance standards. On the service front, ADM offers farmer services, global futures brokerage, and third-party logistics, supported by an expansive global transportation network.
The company does not own farms from which it gets the ingredients to develop its products. ADM works with farmers, providing bespoke services and innovative technologies to help them produce what is needed. ADM is strong at forming partnerships to transform ingredients into novel products.
The company also aims to develop and enrich sustainable business practices. As the company continues to grow and expand its operations, it will need to work with more partners. This paper reviews the collaborative arrangements ADM can enter into through strategic alliances, mergers, and acquisitions. The different forms of partnership have distinct advantages and disadvantages, which ADM can use to explore the best alternative to expand and grow its market share and gain greater competitiveness.
Strategic Alliances
Nike is a renowned footwear company globally, yet it does not manufacture any shoes directly. Gallo, the leading wine producer, is not involved in grape growing. One would wonder how they survive; the answer lies in forming strategic alliances. Strategic alliances have myriad definitions, but they share the common feature of a cooperative arrangement between two or more business entities. Nike and Gallo, among many other companies, form strategic alliances for different reasons.
ADM is globally renowned for providing human and animal nutrition products and services. Still, the company has not yet formed strategic alliances in its business dealings. However, the company stands to benefit immensely from forming strategic partnerships, but it must also consider the various disadvantages of such collaborations. Strategic partnerships are broadly categorized into joint ventures, equity cooperatives, and non-equity cooperatives.
The three main types of strategic alliances can be further broken down into additional classifications. The categories are based on different factors, including the industry, purpose of cooperation, nature of resource exchange, geographical context, functional scope, and the partner’s position in the supply chain, among other considerations. Alliances formed within specific industries can be either vertical, involving partners from different industries, or horizontal, where partners operate within the same industry (Yovanno, 2022).
The purpose of cooperation can be alliances, exploitation, or exploration. Exploitation alliances are established to develop specific capabilities and skills that may be essential to exploit existing opportunities. An exploration alliance is a partnership where partners seek to develop something new, such as a market, service, or product. Depending on the nature of resource exchange, alliances can be either symmetric, characterized by homogeneous resource exchange, or asymmetric, characterized by heterogeneous resource exchange.
Strategic alliances can be categorized as domestic or international, depending on their geographic context. According to Booth et al. (2022), domestic alliances involve partners operating in the same region or country, whereas international alliances involve partners from foreign countries. The functional scope can categorize alliances based on marketing, product or service development, or sales. Finally, based on the partner’s position in the supply chain, alliances can be formed by customers, competitors, suppliers, or third-party actors such as research or university centers.
Joint Ventures
Joint ventures are the primary and most complex form of strategic alliances. A joint venture is formed when two or more companies combine to create a distinct legal entity for conducting a specific type of business. Under the binding agreement, the new entity is supported by the resources provided by the cooperating partners.
Booth et al. (2022) indicate that joint ventures are formed with a specific purpose, and the profits are split between the two companies according to their agreement. The primary benefit of a joint venture is that it enables cooperating companies to manage production and transaction costs more effectively (Booth et al., 2022). The costs encompass the expenses that companies incur in negotiating terms and contingent claims, writing and enforcing contracts, and administering transactions, among other things. Through a joint venture, the partners can achieve their intended purpose at a minimum cost. Apart from being reactive by minimizing costs, a joint venture is also proactive, as it can generate new markets, products, management approaches, organizations, and technologies.
Another significant benefit of joint ventures is encapsulated in the resource dependency approach, which holds that entities exploit their environment to acquire the resources they need. Joint ventures help stabilize the flow of resources a company needs and manage the uncertainties it may face. This facilitates easy entry into new markets, enabling the joint venture to leverage technological, communication, and transportation developments. Yovanno (2022) argues that, amid heightened business competition, it is not easy to penetrate foreign markets, even as companies seek to bolster profitability and increase market share.
However, forming a strategic alliance through a joint venture can enable companies to pool their resources and gain a competitive advantage in a foreign market. Booth et al. (2022) argue that joint ventures offer an effective means of mitigating the risks associated with international expansion and market entry. It becomes essential in research and development as partners agree on a formal framework to leverage each other’s strengths and capabilities. This fosters synergy within the strategic alliance that would not have been achieved if a company had undertaken such operations independently.
Even as joint ventures may suit the different strategic needs of the partnering organizations, they may not work as intended and could fail to meet these objectives. Should AMD desire to form a joint venture, its management should consider several factors that may impede the effective operation of the strategic alliance. According to Booth et al. (2022), history has shown that joint ventures can be unstable, as the firms involved tend to focus more on gains than on the factors and costs involved in maintaining their operations. One of the main limitations that joint ventures encounter is cultural incongruence, as the different corporations have distinct organizational values and cultures that may clash when they come together. Joint ventures that manifest a clash of cultural values are bound to suggest and can fail if not managed appropriately.
Another limitation of joint ventures is the unequal power yielded by the cooperating companies. For instance, AMD could form a joint venture with a more established company, such as Nestlé. As a result, the partners will work hard to twist the benefits to their favor, which will be marked by unequal distribution of workload and resources (Booth et al., 2022). At the same time, the different partners may bring varying levels of expertise or investment, which can lead to grievances and adverse outcomes. The cooperation may also be affected by unfair contractual terms that favor one party, leaving the other powerless to pursue its intended business interests.
Equity Strategic Alliance
The second type of strategic alliance is an equity alliance, in which one company partially acquires another (a partial acquisition) or businesses purchase equity in each other (a cross-equity transaction). This strategic alliance also enables the partnering corporations to enter a new market by leveraging the partner’s marketing and distribution network. Booth et al. (2022) state that companies can also benefit from economies of scale by managing costs that may be beyond the capabilities of a single business entity. Buying equity in another company is a cost-effective way for a company to enter a new market. This form of cooperation also helps partners to overcome obstacles, such as hostile government regulations and stiff competition.
Additionally, a company can acquire a stake in another company as part of its strategy to achieve synergy and gain a competitive advantage. Having an equity cooperation as part of a competitive strategy provides a much-needed defensive means to hedge against an uncertain future. The operation also eases the process of entering a new market, which can be time-consuming.
If a company acquires another reputable company, it helps to enhance its image and create a favorable brand image (Yovanno, 2022). The acquired company enhances the parent company’s overall strategy by bringing essential expertise in targeted areas, such as supply and distribution. The alliance also serves as an effective way to introduce a new product or brand. Big companies can benefit from acquiring small companies with established reputations, which can be useful when introducing a new brand to the market. The acquired company may possess the necessary technology to help the parent company fill a gap in its existing product line.
Equity operations are also subject to several factors that would impact their operation. One of the most significant challenges lies in establishing the actual cost of equity or the liquidation value that must be paid. Yovanno (2022) states that partners may also disagree on the fair terms of the actual value to be paid, which could mean that the cooperation is not favorable to all parties.
One company may also lose its proprietary expertise, which would be a significant drawback that limits the formation of an equity alliance. Governments primarily regulate the operations of business entities, and they may subject an equity alliance to antitrust regulations that govern its operations due to governmental involvement. Booth et al. (2022) state that agreeing to purchase equity in a company also results in a loss of control over the company. Equity cooperation involves ceding a portion to the other company, such that the management would not turn the business over without consulting the other partners. In such situations, partners must exercise transparency and honesty to create trust and avoid operational challenges.
Non-Equity Strategic Alliance
The third primary type of strategic alliance is a non-equity strategic alliance, in which the cooperating companies agree to share resources without equity participation or creating a separate entity. This kind of cooperation is essential in sharing risks, particularly when confronted with uncertainty and instability in a new market. In research by Booth et al. (2022), businesses struggle to maintain their market share, making it difficult for new entrants to launch new products or services and hindering the formation of strategic alliances that could mitigate the risk of failure. The partners can also share knowledge and expertise, as different firms tend to excel in certain areas but lack proficiency in others.
Yovanno (2022) states that the formation of an equity cooperation provides a window for a company to tap into the knowledge and expertise of its partners, which it may be lacking. Such knowledge and expertise can then be applied to benefit the partners, ranging from production knowledge and navigating government regulations to the more effective acquisition and utilization of resources. Such knowledge and expertise promote incredible organizational growth, effective cost management, gaining valuable experience, and achieving efficient production processes.
Non-equity strategic alliances also face several factors that limit their effectiveness, including control-related issues. The different parents may have varying interests that could affect control of the strategic alliance (Booth et al., 2022). This mainly occurs due to uncertainty regarding specific roles, which may limit the partners’ ability to fulfill their commitments to the alliance. For a non-equity alliance to work, strategies must be effectively implemented that cannot be controlled by one party, which may be perceived as a concern by the other partners.
Furthermore, a non-equity alliance may face challenges if one firm spends too much on the other partner for skills. This could be due to low familiarity, making it less convenient for complex undertakings. Complex projects require effective engagement facilitated by the transfer of tacit knowledge, strategic capabilities, and resources among team members (Booth et al., 2022). It is also challenging to ensure that goals and objectives are aligned and that partners interact to achieve mutual economic outcomes.
The partnering firms in the non-equity strategic alliances may also have differential bargaining power. Yovanno (2022) states that the limitation may cause the dominant firm to invest less in technical expertise, reduce its investment, or capture a larger share of final profits. This can have adverse effects on the effective operation of a non-equity strategic engagement.
Finally, it is challenging to quantify each party’s relative contribution of technology and knowledge to the alliance. This would make it challenging to create a detailed contract that states the exact contribution and the final equitable share of profits. As a result, partnering firms will enjoy unequal gains and cause more problems for the non-equity alliance.
Governance Structure Applicable to Strategic Alliances
ADM’s headquarters are located in Chicago, Illinois; however, the company operates in various markets across six continents worldwide. The company’s footprint spans across Europe, the Middle East & Africa (EMEA), Asia-Pacific, North America, and South America (ADM, n.d.). The global footprint enables ADM to integrate local insights and enrich its capabilities. In this way, the company obtains the best ingredients from around the globe to deliver to our customers, wherever they may be.
The company’s structure entails a senior leadership team dedicated to solving today’s and future global nutrition challenges. In the context of strategic alliances, the company would need to adopt a boundaryless organizational structure (Raziq et al., 2021). This would allow the company to establish strategic alliances whose stability depends on the fit between the partners and ADM’s overall strategy. The fits form the basis for evaluating and selecting potential partners.
The strategic fits are defined by partners’ capacities/capabilities, aims and strategies, and negotiation power. For instance, if a partner fails to demonstrate total commitment to the alliance due to misalignment in strategic goals, the defined goals of cooperation may not be realized (Raziq et al., 2021). Essential considerations include cultural fit or proximity (management styles, values, standards, and organizational compatibility), as well as process/infrastructure fit (technical compatibilities of the organization’s systems, such as IT and accounting systems).
Mergers and Acquisitions (M&As)
Mergers and acquisitions (M&As) have been a common occurrence in the business world for over a century. M&As entail activities that react to the transfer of corporate control and cooperation. Companies employ M&A to drive growth, diversify operations, and gain a competitive advantage. Hossain (2021) states that there has been heightened activity in mergers and acquisitions (M&As) over the past decade. This demonstrates businesses’ viability and confidence in using the tool for varied motivations and goals.
ADM has been involved in mergers and acquisitions (M&As) for over 80 years, dating back to its 1929 acquisition of the Commander Larabee flour milling business, when it began crushing soybeans (ADM, n.d.). ADM acquired soybean processing plants in South America and Europe four and a half decades later as part of its globalization efforts. The company later acquired Glencore’s Brazilian operations, facilitating its entry into the edible bean business.
Over the past decade, ADM has embarked on a transformative journey of improvement. From 2014 to 2019, AMD expanded aggressively, primarily through acquisitions (AMD, n.d.). The company sought to align its business portfolio with growing market demand for improved health and well-being, food security, and sustainability. Table 1 below indicates the company’s acquisitions from 2014 to 2019. The business action has propelled the company into one of the top companies in the global agricultural sector. Today, ADM is a cutting-edge innovator, a trailblazer in delivering outstanding solutions to facilitate healthier living, and a premier provider of human and animal nutrition. ADM is also involved in processing operations, supply chain management, sustainability initiatives, and the development of alternatives to petroleum-based products.
Table 1 – AMD 2014-2019 Acquisitions. Source: ADM (n.d.)
Asset Acquisition: Advantages and Disadvantages
ADM has been a significant player in acquisitions, primarily involving the purchase of assets or stock. Asset acquisitions involve the purchase of assets from another business entity and are a favorable approach when the buyer intends to avoid assuming the acquired company’s debts. Companies typically evaluate the tax implications of a deal, and an asset acquisition allows the buyer to obtain a stepped-up basis in the assets equal to the purchase price (Hossain, 2021). However, this applies only if the purchase price exceeds the aggregate tax basis of the assets that the buyer intends to acquire. The buyer can amortize the goodwill associated with the deal for tax purposes over 15 years.
Additionally, asset acquisitions enable the acquiring company to limit the liabilities it assumes. Alternatively, the buyer can disregard any liability assumed by the seller, thereby effectively reducing their risk exposure. According to Suryaningrum et al. (2023), asset acquisition enables the buyer to circumvent challenges posed by shareholders, particularly minority shareholders, who may not agree to surrender their holdings in the company. The process has few complications, as there is no legal requirement to comply with state and federal laws and regulations.
Despite the numerous benefits of asset acquisition, some challenges may limit companies’ ability to utilize this approach. The deal must consider the plight of employees, which may necessitate the buyer renegotiating new terms. Asset acquisitions may require specific assets to be retitled in the buyer’s name, which can take time and incur additional expenses (Hossain, 2021). The seller may offset the tax obligations by charging a higher price. The buyer will also be required to renegotiate contractual agreements with vendors and suppliers, and some contracts may be non-assignable. Another disadvantage is the depreciation of the asset’s value over time, resulting in a lower charge than the buyer initially paid.
Stock Purchase: Advantages and Disadvantages
Acquisition through a stock purchase occurs when the buyer pays money for all or part of the target company’s stockholding. The company still maintains its original form and continues to run as an independent legal entity. The buyer becomes a shareholder of the acquired business entity.
A stock purchase provides a viable option for asset acquisition in jurisdictions that impose higher taxes on the sale and transfer of assets (Suryaningrum et al., 2023). This would enable the purchaser to evade some or all of these taxes that could have been levied if the transaction entailed the purchase of assets. This form of acquisition enables the purchaser to acquire the selling company’s licenses, permits, and non-assignable contracts without seeking the consent of the other party or parties.
Furthermore, unlike asset acquisition, a stock purchase may not require the buyer to renegotiate contracts and new terms with employees. Hossain (2021) states that a stock purchase does not obligate the buyer to re-title the selling company’s assets. This makes the question process much more straightforward than an asset purchase.
Once the buyer pays for the target company’s entire stock value (including all its assets and liabilities), it avoids the costly process of re-evaluating or re-titling each asset of the target. It is also a less complicated option if the selling company is not under the control of many shareholders (Suryaningrum et al., 2023). The buyer can assume the target’s licenses or non-assignable contracts without the other party’s prior approval.
On the other hand, a stock purchase has some disadvantages that may not be desirable to the buyer. If the purchaser pays the entire stock value of the target company, it may be required to assume ownership of assets and liabilities that may not be desirable. Minority shareholders may cause trouble should they refuse to sell their shares in the target company.
According to Hossain (2021), a stock purchase does not allow the buyer to claim tax benefits. There is the risk of acquiring shares in a company whose liabilities have not been disclosed and may not be clear. The buyer must pay for goodwill in the transaction, and the amount is not deductible for tax purposes.
Merger
A merger is the combination of two or more companies to form a single, larger corporation. The deal is undertaken through legal procedures prescribed by state or federal laws. The companies involved may merge to form a new company (a merger of establishment/creation). They can also be collapsed and assume the shape and structure of one of the merging companies (statutory/survival merger) (Hossain, 2021).
Mergers can be affected in various ways, depending on the companies’ positions in the industry. The process may be vertical (such as a merger with a supplier), horizontal (a merger between competing entities that serve the same customers), or congeneric (a merger between separate entities serving the same customers). The newly formed entity adopts the assets and liabilities of all the merging business entities.
Mergers are highly beneficial for companies as they provide a way to grow and increase their market share. Suryaningrum et al. (2023) state that mergers provide a quicker way to grow and expand, and to mitigate initial losses for a business. Merging companies can spread their risks by diversifying their operations, expanding their business scope, and stabilizing their operations. Hossain (2021) states that mergers offer greater management flexibility by providing a diverse pool of management methods and business concepts, good operating conditions, and enhanced overall business performance. The combining of two or more companies creates economies of scale, reducing personnel and management expenses and improving overall business competitiveness.
Additionally, merging loss-making companies with surplus companies can result in tax-saving benefits. The approach also helps loss-making entities to enhance their financial standing and trading capacity. Cross-border mergers enable firms to tap into diverse technological capabilities that they would not otherwise have access to.
New technologies enhance innovation and help to improve business models. According to Suryaningrum et al. (2023), mergers also provide the business with additional capital and enhance its image and reputation. Mergers also enable firms to tap into complementary resources and expand their product lines, which boosts the value of the entities and facilitates the easy attainment of business goals.
However, when two or more companies merge, some employees may lose their jobs as they become redundant. This is particularly problematic in the case of a forceful takeover by a firm seeking to eliminate underperforming sectors of the target firm. Hossain (2021) states that the move also reduces competition, and the new entity may become a monopoly, choosing to increase prices for consumers who may have no other option or choice. There is also the danger of the merger experiencing diseconomies of scale due to its enormous size. There may be challenges of control and the struggle to manage workers who may lose motivation, and the companies may fail to benefit from the new business synergy.
Conclusion
ADM has grown from a small company and has expanded globally through several strategies, including acquisitions. The company can choose to expand its market share through a strategic alliance. Strategic alliances enhance the overall attainment of goals by providing access to new markets, particularly foreign markets that are difficult to penetrate. However, there may be issues of mistrust, control, resource sharing, and dominance.
ADM has acquired several companies through which it has expanded its operations and can continue to benefit from the approach. M&As provide a viable route to tap into new technologies and markets. The combination of different brands enhances the image of a merger and creates beneficial economies of scale. However, several disadvantages exist, including diseconomies of scale, reduced competition, job losses, and reduced business synergy.
References
ADM (n.d.), About ADM.
Booth, G., Taylor, Nevin, M., & Whitehurst, J. (2022). The strategic alliances fieldbook. Routledge.
Hossain, M. S. (2021). Merger & Acquisitions (M&As) as an important strategic vehicle in business: Thematic areas, research avenues & possible suggestions. Journal of Economics and Business, 116, 106004.
Raziq, M. M., Benito, G. R. G., & Kang, Y. (2021). Multinational enterprise organizational structures and subsidiary role and capability development: The moderating role of establishment mode. Group & Organization Management, 105960112110609.
Suryaningrum, D.H., Aziz, A., Meero, A. & Cakranegara, P.A.(2023). Mergers and acquisitions: Does performance depend on managerial ability? 12(1).
Yovanno, D. A. (2022). The partnership economy. John Wiley & Sons.