In the bustling aisles of Target, where shoppers browse through blouses and blenders, there’s also the enticing option to enjoy a cappuccino at one of over 1,700 Starbucks cafes strategically housed within the store. This symbiotic partnership exemplifies more than mere co-location; it’s a strategic alliance that strengthens brands and drives additional sales through increased foot traffic and cross-promotional opportunities. Such alliances are increasingly common, with approximately 3,600 new partnerships formed annually, highlighting their pivotal role in expanding market reach and integrating advanced technologies while preserving operational autonomy.
Recent research by Urooj Khan, an associate professor of accounting at Texas McCombs, reveals another significant benefit of strategic alliances: enhanced access to financing. Companies engaged in alliances often enjoy improved financing terms and greater access to funds through the established financial networks of their partners. Banks, already familiar with one partner, are more inclined to offer favourable terms, such as lower interest rates, to new borrowers entering into these alliances.
This preferential treatment arises from banks gaining insights beyond traditional financial metrics. They assess factors like the alliance partners’ commitment levels, operational capabilities, and overall risk profiles, which are critical in evaluating creditworthiness and mitigating lending risks.
“Predicting whether a company will uphold its commitments within a strategic alliance is challenging, even with formal agreements in place,” explains Khan. “Yet, these alliances have profound implications for the financial performance, cash flows, and revenue streams of the companies involved.”
Khan’s research, conducted with scholars from Washington University in St. Louis, Peking University, and Hong Kong University, analysed a substantial dataset of U.S. bank loans issued to companies engaged in strategic alliances from 1991 to 2016. Their findings underscore several vital advantages: borrowers within alliances were 6% more likely to secure financing from banks connected to their alliance partners than those without such links. Moreover, loans from alliance-affiliated banks typically carried interest rates of 0.13 percentage points lower, resulting in an average 7% reduction in borrowing costs.
The study further highlighted that alliance-affiliated banks were inclined to offer favourable terms when the alliance was economically significant or closely aligned with the company’s core operations or market segments. Additionally, lower transparency or weaker accounting standards on the part of the borrowing company heightened the importance of insider information from its alliance partner in the lending decision.
These findings have significant implications for both banks and companies considering strategic alliances. Banks can leverage new alliance partnerships to deepen relationships with existing clients and expand their business portfolios. The research underscores the strategic advantage of forming partnerships for companies, especially those anticipating future financial needs. This enhances market access and technological capabilities and strengthens financial positioning through improved lending terms and access to capital, empowering them with a powerful tool in their economic strategy.
“Traditionally, companies have pursued alliances primarily for market expansion, technology acquisition, or cost efficiencies,” notes Khan. “Our research underscores the additional benefit of leveraging each other’s financial networks, underscoring the importance of robust banking relationships in selecting and evaluating potential alliance partners.”
More information: Urooj Khan et al, Strategic Alliances and Lending Relationships, The Accounting Review. DOI: 10.2308/TAR-2021-0359
Journal information: The Accounting Review Provided by The University of Texas at Austin