Chapter 10 Studying Mergers and Acquisitions

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Chapter 10Studying Mergers and Acquisitions
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OBJECTIVES
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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
Where?
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
Speed and sequence of moves?
How?
How does the acquisition help the firm earn
profit?
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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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
37
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36
1
4
Source J.L. Bower, Not All MAs Are Alike
and That Matters, Harvard Business Review 793
(2001), 92-101
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THE NATURE OF ACQUISITIONS CAN TAKE MANY FORMS
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THE SYNERGY TRAP NOT ALL ACQUISITIONS SUCCEED
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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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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EIGHT KEY QUESTIONS FOR STRATEGIC ASSESSMENT

1. What is the strategic logic behind the
   acquisition? Why this company?
2. Is the target industry attractive? What are the
   key segments? What is the prognosis for industry
   evolution?
3. Is this an international acquisition? What are
   the key differences and performance
   implications?
4. Does an analysis of the target indicate it is
   healthy and viable?
5. How well does the company fit with ours? What
   are the expected benefits? What risks might
   occur?
6. How will the organization be integrated how
   will it be organized?
7. Have alternative scenarios been considered? What
   is the best case/worst case scenario?
8. Is the valuation reasonable?

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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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TIPS FROM PERRY AND HERD
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DUE DILIGENCE PAYS
Due Diligence
Penalties
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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