Chapter 10 - Studying Mergers and Acquisitions docx

Chapter 10 Studying Mergers and Acquisitions 2 OBJECTIVES Explain the motivations behind acquisitions and show how they’ve changed over time 1 Explain why mergers and acquisitions are important vehicles of corporate strategy 2 Identify the various types of acquisitions 3 Understand how the pricing of acquisitions affects the realization of synergies 4 Outline the alternative ways to integrate acquisition and explain the implementation process 5 Discuss the characteristics of acquisitions in different industry contexts 6 3 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 $250 million premium we paid with savings and revenue growth? 4 MERGER VS. ACQUISITION Merger Acquisition A A B B C A The purchase of one firm by another so that ownership transfers The “merger” of Daimler with Chrysler in 1997 is considered by many to have been an acquisition in disguise The consolidation or combination of one firm with another 5 MOTIVES FOR MERGERS AND ACQUISITIONS Sometimes termed “Managerialism”, manager can conceivably make acquisitions-and even willingly overpay for them- to maximize their own interests at the expense of shareholder wealth Managers may make mis- taken valuation and have unwarranted confidence in their valuation and in their ability to create value because of pride, over- confidence, or arrogance Managers may believe that the value of the firms combined can be greater than the sum of the two independently • Reduced threats • Increased market power and access • Realized cost savings • Increased financial strength • Sharing and leveraging capabilities Managerial self-interest Hubris Synergy 6 M&A – A VEHICLE THAT IMPACTS ALL ELEMENTS OF THE STRATEGY DIAMOND M&A and the Strategy Diamond While mergers and acquisition are explicitly vehicles of strategy, they have major implications for arenas staging, and economic logic as well Economic logic Arenas VehiclesStaging Differentiators Source: Adapted from Hambrick and Fredrickson, “Are You Sure You Have a Strategy?” Academy of Management Executive 15:4 (2001) 48-59 7 US ACQUISITION ACTIVITY Source: Data compiled from SDC Platinum, a product of Thompson Financial Value of transactions ($, 2003) Number of transactions Value of transactions ($, 2003) No. of transactions 8 1972 1` 1` In 1972, brothers-in- law Leonard Marsh and Hyman Golden and Arnold Greenberg, Marsh’s 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 America’s Beverage division, which includes 7up, Dr. Pepper, Mystic, and Mott’s juices, among other brands. Has Snapple found its home? Fewer than three years later, Quaker throws in the towel and sells Snapple for $300 million to Triarc UPs AND DOWNs AT SNAPPLE 1994 1997 2000 After sizzling success, Snapple is sold to Quaker for $1.8 billion 9 THE FLIP SIDE OF ACQUISTIONS “…the sale preparation process rarely gets the same attention as the acquisition process.” – McPhee and Heckler 10 BENEFITS AND DRAWBACK OF ACQUISITIONS OVER INTERNAL DEVELOPMENT • Speed • Critical Mass • Access to complementary assets • Reduced competition • Move expensive • Inherit adjunct businesses • Cannot spread commitment over several years (one-time, all-or-nothing decision) • Potential for organizational conflict [...]...CLASSIFICATION OF ACQUISITIONS Overcapacity M&A Roll-up-M&A Product/ Market Extension M&A as R&D Industry Convergence Example DaimlerChrysler merger Service Corporation International more than 100 acquisitions of funeral homes Pepsi’s acquisition of Gatorade Intel’s dozens of acquisitions of small high tech companies AOL’s acquisition Time-Warner Objectives Eliminating capacity, gaining market share, and increasing... negotiation Idea Decision-making process 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 13 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 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 Cisco’s remote sites • Have a company headquarters and most manufacturing Cisco’s core product space • Have a technology that can... the target , and instead learned from it in preparation for future growth (e.g., many of Wal-Mart’s early international acquisitions) 16 HOLDING Need for strategic interdependence Low High High Preservation Symbiosis Low Holding Absorption Need for organizational autonomy The acquiring company allows little autonomy - yet does not integrate the target into its businesses (e.g., Bank One’s acquisitions. .. DILIGENCE PAYS Due Diligence Penalties 21 M&As AND INDUSTRY LIFE CYCLE Introduction M&As tend to be R&D and productrelated Growth M&As tend to be for acquiring products that are proven and gaining acceptance Maturity M&As primarily for dealing with over capacity in the industry 22 M&As IN DYNAMIC CONTEXTS Technological change Cisco and Microsoft both use acquisitions to ensure they maintain their strong... 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) 18 KEY LESSONS FOR IMPLEMENTING M & As It’s a continual process, not an event Start the integration process long before the deal is closed Integration management is a full-time job Many... the essence because of the cost and time value of money Integration should address technical and cultural issues Most managers focus on technical issues only This is a mistake 19 TIPS FROM PERRY AND HERD 1 Firms must study failed M&As as much as successes 2 Traditional due diligence is no longer sufficient With M&A deals increasingly risky, there is more need for pre-deal planning 20 DUE DILIGENCE... 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 37% 9% 36% Percent of all M&A deals 1% 4% Source: J.L bower, “ Not All M&As Are Alike – and That Matters,” Harvard Business Review 79:3 (2001), 92 -1 01 11 THE SYNERGY... Tribune Company merged with Times-Mirror in 2000, it acquired Spanish-language “Hoy” to target the growing U.S Hispanic market Geopolitical change IBM divested its PC division to a Chinese company as that country emerges Trade liberalization Wal-Mart acquired Mexican retail giant, Cifra, in wake of NAFTA Deregulation AT&T divested local operations into “Baby Bells” and set off a state of almost constant... manufacturing Cisco’s core product space • Have a technology that can be delivered through Cisco’s existing distribution channels • Have a technology and products that can be supported by Cisco's support organization • Is able to leverage Cisco’s existing infrastructure and resource base to increase its overall value facilities close to one of Cisco's main sites 14 ABSORPTION Need for strategic interdependence . Chapter 10 Studying Mergers and Acquisitions 2 OBJECTIVES Explain the motivations behind acquisitions and show how they’ve changed over time 1 Explain why mergers and acquisitions. with another 5 MOTIVES FOR MERGERS AND ACQUISITIONS Sometimes termed “Managerialism”, manager can conceivably make acquisitions -and even willingly overpay for them- to maximize their own interests. commitment over several years (one-time, all-or-nothing decision) • Potential for organizational conflict 11 CLASSIFICATION OF ACQUISITIONS Overcapacity M&A Roll-up-M&A Product/ Market Extension M&A