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
11
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
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 of
all M&A
deals
37% 9% 36% 1% 4%

Source: J.L. bower, “ Not All M&As Are Alike – and That Matters,” Harvard Business Review 79:3 (2001), 92-101
12
THE SYNERGY TRAP
Acquisition premiums Create two problems for managers
Premiums increase
the level of returns
the combined
businesses must
extract
The longer it takes
to implement
performance
improvements, the
more likely the
acquisition will fail
13
THE ACQUISITION PROCESS
Source: Adapted from P.C. Haspeslagh and D.B. Jemison, Managing Acquisitions: Creating Value Through Corporate Renewal (New
York Free Press, 1991), 42
A process perspective
Idea
Justification
due diligence,
negotiation
Acquisition
integration
Results
Decision-making
process problems
Integration process problems

14
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
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
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
facilities close to one of Cisco's main sites
15
ABSORPTION
Need for strategic interdependence
Need for
organizational
autonomy
High
Low
High
Preservation Symbiosis
Holding Absorption
Low
Acquiring company completely absorbs the target
company. If the target company is large, this can take
time (e.g., Franklin Quest’s acquisition of the Covey
Leadership Center to create Franklin Covey)
16
PRESERVATION
Need for strategic interdependence
Need for
organizational
autonomy
High
Low
High
Preservation Symbiosis
Holding Absorption

Low
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-Mart’s early international
acquisitions)
17
HOLDING
Need for strategic interdependence
Need for
organizational
autonomy
High
Low
High
Preservation Symbiosis
Holding Absorption
Low
The acquiring company allows little autonomy - yet does
not integrate the target into its businesses (e.g., Bank
One’s acquisitions of local banks )
18
SYMBIOSIS
Need for strategic interdependence
Need for
organizational
autonomy
High
Low
High
Preservation Symbiosis

Holding Absorption
Low
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)
19
KEY LESSONS FOR IMPLEMENTING M & As
Integration management is a full-time job
Many successful acquirers appoint an “integration manager” because
integration is too much work for acting managers to add to their workloads
Key decisions should be made swiftly
Speed is of 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
It’s a continual process, not an event
Start the integration process long before the deal is closed
20
TIPS FROM PERRY AND HERD
Firms must study failed M&As as
much as successes.
1
Traditional due diligence is no longer
sufficient. With M&A deals
increasingly risky, there is more need
for pre-deal planning.
2
21
DUE DILIGENCE PAYS

Penalties
Due Diligence
22
M&As AND INDUSTRY LIFE CYCLE
Introduction
M&As tend to be
R&D and product-
related
Growth Maturity
M&As tend to be for
acquiring products
that are proven and
gaining acceptance
M&As primarily for
dealing with over
capacity in the
industry
23
M&As IN DYNAMIC CONTEXTS
Technological
change
Cisco and Microsoft both use acquisitions to ensure
they maintain their strong competitive positions
Demographic
change
Geopolitical
change
Trade
liberalization
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
Deregulation
AT&T divested local operations into “Baby Bells” and set off a
state of almost constant M&A