Chapter 10 Studying Mergers and Acquisitions

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Chapter 10Studying Mergers and Acquisitions
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OBJECTIVES
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THE eBAY-PAYPAL ACQUISITION
The partnership made sense
but would it work?
?

• Rely on transaction-based revenue
• No inventory or warehousing
• No sales force

Can we recoup the 250 millionpremium we paid
with savingsand revenue growth?
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THE eBAY-PAYPAL BUSINESS MODELS
eBay business model
PayPal business model
eBay
PayPal
Posts auction, pays fee
Wins auction
Receives money(pays fee)
Sends money
Contract and payment occur between buyer and
seller
Buyer
Seller
PayPals revenue comes from float in the personal
accounts and fees for pre-mier and business
accounts
eBay revenue comes from sellers paying auction
posting fees
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MERGER VS. ACQUISITION
A
B
C
The consolidation or combinationof one firm with
another
Merger

A
B
A
The purchase of one firm by another so that
ownership transfers
Acquisition

The mergerof Daimler with Chryslerin 1997 is
considered by manyto have been an acquisitionin
disguise
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MOTIVES FOR MERGERS AND ACQUISITIONS
Managerial self-interest
Hubris
Synergy
Sometimes termed Managerialism, manager can
conceivably make acquisitions-and even willingly
overpay for them-to maximize their own interests
at the expense of shareholder wealth
Managers may make mis-taken valuation and have
unwarranted confidence in their valuation and in
their ability to create value because of pride,
over-confidence, or arrogance

• Managers may believe that the value of the firms
  combined can be greater than the sum of the two
  independently
• Reduced threats
• Increased market power and access
• Realized cost savings
• Increased financial strength
• Sharing and leveraging capabilities

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MA A VEHICLE THAT IMPACTS ALL ELEMENTS OF THE
STRATEGY DIAMOND
MA and the Strategy DiamondWhile mergers and
acquisition are explicitly vehicles of strategy,
they have major implications for arenas staging,
and economic logic as well
Source Adapted from Hambrick and Fredrickson,
Are You Sure You Have a Strategy? Academy of
Management Executive 154 (2001) 48-59
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US ACQUISITION ACTIVITY
Value of transactions (, 2003)
Number of transactions
Value of transactions(, 2003)
No. of transactions
Source Data compiled from SDC Platinum, a
product of Thompson Financial
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UPs AND DOWNs AT SNAPPLE
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In 1972, brothers-in-law Leonard Marsh and Hyman
Golden and Arnold Greenberg, Marshs childhood
friend, founded a business called the
Unadulterated Food Corporation and began selling
juice in Queens. The name Snapple was coined
while trying to develop an apple soda. In 1987,
Snapple introduced iced teas with fun names and
flavors and enlisted (2) controversial radio
personalities, Howard Stern and Rush Limbaugh, to
promote them
Cadbury Schweppes buys Snapple from Triarc for
1.45 billion. Snapple is now part of the very
successful Americas Beverage division, which
includes 7up, Dr. Pepper, Mystic, and Motts
juices, among other brands. Has Snapple found
its home?
After sizzling success,Snapple is sold to
Quakerfor 1.8 billion
Fewer than three years later, Quaker throws in
the towel and sells Snapple for 300 million to
Triarc
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BENEFITS AND DRAWBACK OF ACQUISITIONS OVER
INTERNAL DEVELOPMENT

• More expensive
• Inherit adjunct businesses
• Cannot spread commitment over several years
  (one-time, all-or-nothing decision)
• Potential for organizational conflict

• Speed
• Critical Mass
• Access to complementary assets
• Reduced competition

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CLASSIFICATION OF ACQUISITIONS
Product/MarketExtension
OvercapacityMA
Industry Convergence
Roll-up-MA
MA as RD
Example
DaimlerChryslermerger
Service Corporation International more than 100
acquisitions of funeral homes
Pepsis acquisition of Gatorade
Intels dozens of acquisitions of small high tech
companies
AOLs acquisition Time-Warner
Objectives
Eliminating capacity, gaining market share, and
increasing efficiency
Efficiency of larger operations (e.g., economies
of scale, superior management)
Synergy of similar but expanded product lines of
geographic markets
Short cut innovation by buying it from small
companies
Anticipation of new industry emerging culling
resources from firms in multiple industries whose
boundaries are eroding
Percent ofall MA deals
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36
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4
Source J.L. bower, Not All MAs Are Alike
and That Matters, Harvard Business Review 793
(2001), 92-101
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PRICING MERGERS AND ACQUISITIONS
Target value
Synergy value
Current market capitalization of firm (i.e., what
stock market believe company is worth )
Market value of two firms combined with synergies
taken into account
Market value
Fundamental value of cash flows
Fundamental value of cash flows of two firms with
synergies taken into account
Intrinsic value
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PREMIUMS
130
Percent of market value
145
30 - 45
100
Average pre-miums in US range30 - 45
Acquisitionprice
Market value
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THE SYNERGY TRAP
Acquisition premiums
Create two problems for managers
The longer it takes to implement performance
improvements, the more likely the acquisition
will fail
Premiums increase the level of returns the
combined businesses must extract
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HOW WOULD YOU DO THAT? PAYPAL ACQUISITION
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PAYING TOO MUCH
The market, like the Lord, helps those who help
themselves. But, unlike the Lord, the market
does not forgive those who know not what they do
(A) too-high purchase price for the stock of an
excellent company can undo the effects of a
subsequent decade of favorable business
development
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THE ACQUISITION PROCESS
A process perspective
Results
Acquisitionintegration
Justification due diligence, negotiation
Idea
Decision-makingprocess problems
Integration process problems
Source Adapted from P.C. Haspeslagh and D.B.
Jemison, Managing Acquisitions Creating Value
Through Corporate Renewal (New York Free Press,
1991), 42
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ACQUISITION SCREENING
Soft-fit acquisition screening by Cisco systems
Screening criteria
Means of achieving criteria
Offer both short- and long-term win-wins for
Cisco acquired company

• Have complementary technology that fills a need
  in Ciscos core product space
• Have a technology that can be delivered through
  Ciscos existing distribution channels
• Have a technology and products that can be
  supported by Cisco's support organization
• Is able to leverage Ciscos existing
  infrastructure and resource base to increase its
  overall value

Share a common vision and chemistry with Cisco

• Have a similar understanding and vision of the
  market
• Have a similar culture
• Have a similar risk-taking style

Be located (preferably) in Silicon Valley or near
one of Ciscos remote sites

• Have a company headquarters and most
  manufacturing facilities close to one of Cisco's
  main sites

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ABSORPTION
Need for strategic interdependence
High
Low
High
Preservation
Symbiosis
Need for organizational autonomy
Low
Holding
Absorption
Acquiring company completely absorbs the target
company. If the target company is large, this
can take time (e.g., Franklin Quests acquisition
of the Covey Leadership Center to create Franklin
Covey)
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PRESERVATION
Need for strategic interdependence
High
Low
High
Preservation
Symbiosis
Need for organizational autonomy
Low
Holding
Absorption
The acquiring company makes very few changes to
the target , and instead learned from it in
preparation for future growth (e.g., many of
Wal-Marts early international acquisitions)
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HOLDING
Need for strategic interdependence
High
Low
High
Preservation
Symbiosis
Need for organizational autonomy
Low
Holding
Absorption
The acquiring company allows little autonomy -
yet does not integrate the target into its
businesses (e.g., Bank Ones acquisitions of
local banks )
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SYMBIOSIS
Need for strategic interdependence
High
Low
High
Preservation
Symbiosis
Need for organizational autonomy
Low
Holding
Absorption
The acquiring company integrates the target in
order to achieve synergies but allows for
autonomy, for example to retain and motivate
employees. This is possibly the most difficult
to implement (e.g., Cisco's acquisitions which
cost the firm 1 million per employee on average)
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KEY LESSONS FOR IMPLEMENTING M As
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MAs AND INDUSTRY LIFE CYCLE
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MAs IN DYNAMIC CONTEXTS
Cisco and Microsoft both use acquisitions to
ensure they maintain their strong competitive
positions
When the Tribune Company merged with Times-Mirror
in 2000, it acquired Spanish-language Hoy to
target the growing U.S Hispanic market
IBM divested its PC division to a Chinese company
as that country emerges
Wal-Mart acquired Mexican retail giant, Cifra, in
wake of NAFTA
ATT divested local operations into Baby Bells
and set off a state of almost constant MA
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SUMMARY
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EXERCISES

• CLASS EXERCISE
• Identify a company that has recently undertaken
  an acquisition. Study the terms of the deal and
  identify to the extent possible the intrinsic
  value of the target, its market value, and the
  acquisition price. What was the acquisition
  premium? Calculate the required performance
  improvements with different assumptions as to how
  long it will take to implement them, say one,
  three, and five years. Is this believable?
• GROUP EXERCISE
• Pick a firm of interest to your group. Identify
  potential acquisition candidates. Explain why
  these companies would make sense as an
  acquisition target. Evaluate and describe
  possible implementation barriers to this
  acquisition.
• POST ACQUISITION EXERCISE
• Yincom and Yangnet