COMM 401 Strategy

1
COMM 401 Strategy Competition

• Mergers Acquisition Restructuring
  Strategies (Ch 8)

2
Increasing Use of MAs

• 1950s - 1970s Autonomous growth
• Reinvesting gains in the firm
• Stable employment
• Prolonged presence in core markets
• 1980s Merger Mania
• 30,000 full acquisitions
• 25,000 more partial acquisitions
• Combined value 2 trillion (2,000,000,000,000)
• 1990s Merger Stampede!
• 1990 700 billion
• 1998 4 trillion
• 1999 5 trillion

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Definitions Mergers Acquisitions

• Merger A transaction where two firms agree to
  integrate their operations on a relatively
  coequal basis because they have resources and
  capabilities that together may create a stronger
  competitive advantage (The newly formed company
  often takes on a new name afterwards)
• Acquisition A transaction where one firm buys
  another firm with the intent of more effectively
  using a core competence by making the acquired
  firm a subsidiary within its portfolio of
  businesses (The acquirer usually keeps its name,
  whereas the acquired usually becomes a brand
  name).
• Takeover An acquisition where the target firm
  did not solicit the bid of the acquiring firm

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Types of Acquisitions

• Friendly takeover (Acquisition)
• Two companies agree to merge their activities
  voluntarily (the target firm often solicits the
  acquirers bid).
• Hostile takeover
• An acquisition where the target firm did not
  solicit the bid of the acquiring firm
• Companies often protect themselves (through
  poison pills) against hostile takeovers (e.g.,
  using a holding company with a controlling
  minority stake issuing certificates rather than
  shares, selling patents other knowledge
  assets to another firm)
• White Knight takeover
• One company buys up another in order to save the
  latter from the prospect of a hostile takeover
  (preventing mass lay-offs, keeping the company
  name, preventing a split-up, saving national
  heritage)

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Modes of Acquisition

• Cash transaction
• A firm simply buys up a controlling set of shares
  of another company (say, 51) by writing a check
  to whomever owns the stock
• Existing company funds (war money)
• Bank loans
• Stock swap
• Companies often do not possess the required
  amount of financial resources. If that is the
  case, they can still buy up another firm by
  offering its shareholders a price that is to be
  paid in company stocks
• Combination
• Offering shareholders both cash and stocks

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Types of Acquisitions

• Horizontal Acquisition When a firm acquires a
  competitor or a business in a highly related
  industry (e.g. Rona Acquires Reno Depot )
• Vertical Acquisition When a firm acquires a
  supplier (backward) or distributor (forward) that
  are positioned backward or forward in the firms
  value chain (e.g. Yahoo acquires Inktomi)

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Seducing Management or Shareholders

• Buying a firm means (a) convincing its management
  that a merger is wise, or (b) seducing the
  majority of its shareholders to sell their stock
• In the first case, shareholders have no say, and
  can later only convert their shares
• In the second case, shareholders are often simply
  approached through the stock exchange (when
  ownership is highly dispersed)
• When ownership is more concentrated, companies
  can buy a controlling stake from a limited set of
  stakeholders in a back room

8
Reasons for Acquisitions
Problems in Achieving Acquisition Success
Acquisitions
9
Benefits of MAs

• Mergers lead to increased corporate size, and
  hence to increased market power (increasing
  prices)
• Capitalizing on economies of scale and/or scope
• Overcoming barriers to entry (when brand loyalty
  and/or large investments are required)
• Access to new international markets
• ? Cross-border acquisitions (e.g. Best Buy ?
  Future Shop)
• Filling existing resource gaps
• Gaining access to a new, talented workforce
• Diversification into related areas helps to
  generate synergies
• Diversification into unrelated areas helps spread
  risks

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Benefits of MAs

• Offering a more complete range of products and
  services (to facilitate one-stop shopping) ?
  (Microsoft Hotmail)
• Lower risk compared to developing new products
  (existing/proven brand name)
• Gaining access to consumers in the high end (Fiat
  Ferrari) or low end (Daimler Chrysler) of the
  market
• Buying a company means buying its patents
  (biotechnology)
• Buying up a competitor can reduce the level of
  competition in an industry (WWE acquires WCW)
• Gaining more control over the supply of raw
  materials and distribution channels

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Do MAs Benefit Shareholders?

• Mergers consistently fail to generate value for
  shareholders for acquiring firms
• 83 fail to increase shareholder value in
  acquiring firms
• 53 actually reduce the value of the acquirer
• Moreover, companies that follow MA strategies
  typically lag behind companies pursuing
  autonomous growth in terms of
• Innovativeness
• Profitability
• Productive efficiency

12
MAs and Shareholders

• Main reason for value destruction MAs siphon
  off resources from RD
• Companies that invest heavily in MAs invest less
  in research and development activities
• Much of what they do invest in RD is applied and
  oriented towards the short run, rather than
  fundamental and oriented towards the long run
• Therefore, they realize less new patents and
  other knowledge assets than companies that grow
  autonomously
• They also lag behind their competitors in terms
  of overall quality improvements, efficiency of
  their productive processes, and innovativeness of
  their products.

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MAs Disadvantages

• Inadequate evaluation of target/due diligence
  difficulties (bidding wars, premium paid to
  convince shareholders)
• Operational integration/synergies (in terms of
  production, information systems, and the like)
  are hard to accomplish
• Good managers and employees often leave the
  company after a merger
• Corporate cultures are notoriously hard to merge
  (persistence of we them thought)
• Good suppliers and customers often lose their
  faith in a company, and seek for alternatives
• Managerial resources are spread thin when (a) the
  company becomes too diversified, and (b) managers
  are overly focused on acquisitions
• Too much debt

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MAs Disadvantages

• Too large - Mergers make organizations larger and
  more complex, thereby putting additional strains
  on company management
• It can be hard to divest the unwanted parts of
  a newly acquired business for a fair price
• Mergers can wane shareholder confidence
• Mergers often inspire competitors to merge too,
  thereby reducing the intended benefits
• Anti-trust laws often forbid a merger, usually
  after significant investments in partner search
  and due diligence
• Even if anti-trust authorities dont forbid a
  transaction, they can still impose unfavorable
  conditions upon it

15
Finding a Balance

• Mergers often fail, but they still are a valuable
  strategy
• Especially strategic mergers aimed at reducing
  competition, gaining more control over partners
  or suppliers, or at gaining access to new
  (geographical) markets market segments can be
  successful
• Companies should be very careful, however, if
  they intend to use mergers to improve their
  productive efficiency, research and development
  output, and the like
• Grooming - establish relationship before
  acquisition
• Friendly acquisition facilitates speed
  reduces premium
• Maintain financial slack moderate debt
• Continue investing in RD focus on innovation

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Restructuring

• Restructuring refers to changes in the
  composition of a firms set of businesses and/or
  financial structure (often due to poor
  performance and over-diversification)
• Downsizing
• Wholesale reduction of employees
• Downscoping
• Selectively divesting (sell or spin-off) or
  closing non-core businesses
• Reducing scope of operations
• Leads to greater focus
• Leveraged Buyout (LBO)
• A party buys a firms entire assets in order to
  take the firm private (MBO, EBO, whole-firm
  buyout).

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Restructuring and Outcomes