USHAA - Stimulus Plan Alert

The Union of David and Goliath: Strategic Minority-Majority Joint Ventures and Alliances for Competitive Advantage


Luis J. Diaz,
March 6, 2009

The global financial system has effectively collapsed, undermining business confidence, pushing the economy into a lengthy and severe recession, and taking a toll on the bottom line of many middle-tier companies.1 “In this brave new world, joint ventures and strategic alliances, when properly structured, provide a competitive advantage to both minority and majority partners in sourcing work,” according to Jeff Jones, Senior Vice President of Supply Chain Management for Bank of America.

The recently enacted American Recovery and Reinvestment Act of 2009 (“Act”) seeks to stimulate the economy by injecting $825 billion, equal to 5.5 percent of the nation’s gross domestic product, into the economy. An estimated $311 billion in appropriations ($9 billion in New Jersey alone) will be targeted as direct investments in key initiatives like infrastructure projects, healthcare spending, and renewable energy. Part I of this article discusses the resulting opportunities at the federal, state, and corporate levels. Part II addresses how strategic minority-majority joint ventures and alliances can leverage these opportunities for mutual benefit.


It is expected that the economic stimulus program will provide unparalleled business opportunity to certified minority business enterprises or ventures (MBEs) owned and controlled by minorities, women, and disabled veterans. While the text of the Act does not expressly refer to minority businesses, Section 1610 requires compliance with the Federal Acquisition Regulations (FAR), which governs all federal contracts. This conclusion is supported by the guidance memorandum issued by the Director of the Office of Management and Budget, which states that “[a]gencies are expected to follow the same laws, principles, procedures, and practices in awarding non-competitive contracts with Recovery Act funds” as they do with other funds.2 The memorandum makes clear that agencies must provide:

"[m]aximum practical opportunities for small businesses to compete for agency contracts and to participate as subcontractors in contracts awarded by agencies. Agencies may take advantage of any authorized small business contracting program. If, in making an award to a small business, a non-competitive procedure is used, such as a non-competitive set-aside under section 8(a) of the Small Business Act, then a summary of such contract, including a description of the supplies and services, shall be posted in a special section of”

The Act also foretells a more prominent role for the Small Business Administration (SBA). It provides additional funding for the SBA’s flagship 7(a) program. Moreover, President Obama’s choice to lead the agency, Karen Gordon Mills, has a financier’s background, a penchant for public-private partnerships, and extensive hands-on experience as a small business advocate, particularly for women-owned businesses.

At the state level, it is expected that a substantial amount of stimulus plan dollars will flow to MBEs through state agencies. At least 27 states have MBE development strategies involving certification of minority- and women-owned businesses for participation in state procurement.3 In addition, many states are already appointing special procurement officers to deal with Recovery Act funds. However, the dialogue is just beginning with such groups as the National MWBE Directors Association and the United States Hispanic Chamber of Commerce as to the precise ways in which the Act will impact MBEs.

The Act also will spur additional business opportunities for top Fortune 500 companies that have established supplier diversity programs and that will be receiving stimulus funds. In a global economy that is increasingly diverse, many Fortune 500 corporations have come to embrace and value supplier diversity as a strategic imperative that makes sense given America’s changing demographics and the burgeoning purchasing power wielded by women and minority consumers. Today’s corporate minority purchasing programs are very different from the “starter” programs of the 1970s. Early programs grew out of federal special preference legislation—from the Small Business Administration’s 8(a) program to FAR and Public Law 95-507 on minority purchasing. Modern-day minority purchasing programs have full-time administrators, dedicated staff, annual purchasing goals set in both dollar amounts and percentages, an efficient tracking system, a minority supplier database, and a strong outreach program. America’s top corporations have even created an elite group called “The Billion Dollar Roundtable.” To belong to this group, a company must spend a minimum of $1 billion annually on contracts with first-tier MBE suppliers. Even in these tough times, the membership list includes great corporations like AT&T, IBM Corporation, The Kroger Co., Lockheed Martin Corporation, Verizon, Procter & Gamble, and many others.


While measurable and substantial progress has been made by MBEs, many still lack adequate capital and size to take full advantage of some of the federal, state, and corporate opportunities provided by the Act. Similarly, middle-tier majority companies facing diminishing revenues are looking for qualitative differentiators to compete more effectively. In this brave new world, expanding the use of David-Goliath mergers, acquisitions, and strategic partnerships makes sense for both MBEs and middle-tier majority companies.4

It is interesting to note that most Requests for Proposals issued by governmental entities or major corporations today inquire about workplace diversity, supplier diversity, and MBE status. While a middle-tier company’s diversity best practices do not guarantee new business, the absence of a diversity program can act as a negative differentiator and result in the loss of business to a more savvy and diverse competitor.

In light of new market pressures, some trend-setting majority companies are implementing market segmentation strategies that involve forging David-Goliath joint ventures and alliances with certified MBEs to leverage new markets and opportunities provided by the Act. Other reasons for these joint ventures and alliances include: (i) business entry, (ii) cost reduction and consolidation, (iii) risk sharing, (iv) new distribution channels, (iv) geographic expansion of customer base, and (v) leveraging new business opportunities such as those provided by Fortune 500 supplier diversity programs.5

David-Goliath joint ventures and alliances can represent a wide range of collaborative business arrangements. The simplest relationship involves a supplier diversity imitative where the majority company outsources work to one or more certified MBEs and then leverages the MBE-spend and relationships for bilateral business opportunities. At the opposite end of the spectrum is the traditional merger and acquisition (M&A) transaction where the majority company acquires a minority ownership stake (up to 49%) in an existing certified MBE to pursue new market opportunities. M&A is a popular option during periods of depressed economic activity as it can provide immediate top line revenue and facilitate the quick entry into new markets with lower capital expenditure. Joint ventures lie somewhere in between and usually involve the creation of the new entity that is 51% owned and controlled by a certified MBE, but with a significant degree of integration between the two parties. Ernest C. Williams, Director of Certification and Special Projects for NJ Transit, actively promotes joints ventures “as effective vehicles for minority and majority companies to collaborate for mutual benefit.” Depending on its structure including MBE ownership, control, and profit sharing, a David-Goliath joint venture itself can qualify for MBE status with certification programs like the NMSDC.

As with any business relationship, both majority and MBE companies are well advised to conduct sufficient diligence and implement best practices before forming a David-Goliath joint venture or alliance. When alliances are based on “best practices,” the research suggests that they are nearly three times more likely to succeed.6 However, the failure to conduct adequate diligence and adhere to best practices can result in difficulties concerning: (i) the sharing of management, (ii) culture differences, (iii) misappropriation of proprietary technologies and methods, (iv) commercial objectives, (v) chain of command, (vi) managerial commitment and communications, (vii) financing company growth, (viii) poorly drafted documents, and (ix) exit strategies.

Majority and MBE companies are well advised to steer clear of “front companies” and similar subterfuge structures. Aside from the ethical issues raised by the unscrupulous nature of these practices, they also will result in unnecessary legal risk. The SBA Office of Inspector General (OIG) recently reported on past abuses involving “front companies” diverting federal small business contracts to large businesses. President Obama has committed to “end the diversion of federal small business contracts to corporate giants.”7 Further, both government certification programs like SBA 8(a) and Disadvantaged Business Enterprise (DBE), and corporate certification programs like WBENC and NMSDC, have adopted stringent practices to prevent fronts.

In light of business opportunities created by the Act and Fortune 500 supplier diversity programs, David-Goliath joint ventures and alliances can be leveraged for the mutual benefit of majority middle-tier and MBE companies. Choosing the right joint venture or partnering structure amid the turmoil in the current market, as well as the complexity of these options, requires knowledge of the Act, adequate diligence, supplier diversity, best practices, experience, and sound financial and legal advice.

Should you have any questions concerning your own situation, please contact Luis J. Diaz, Director and Chief Diversity Officer for Gibbons, or anyone in the Corporate Department.

Reprinted by USHAA with permission from Gibbons P.C.