MGT' 5391

1
MGT. 5391 MA Mergers/Acquisitions
2
Quiz 4

• Why do approximately 85 of MAs fail?
• Why are Ciscos acquisitions successful?
• How many internal groups or teams does Cisco use
  in their acquisitions?
• What are the names of these Cisco groups or
  teams?
• What are Enterprise Teams? Where are they
  located at?

3
A Firms Internal and External Growth Strategies
External Market and Other Forces
Market/Customer Insights
Commercial
Organizational
Corporate And Business Strategies
Value Chain Core Competencies Identification
Increased Capabilities (Internal Growth)
Increased Performance
Outsourcing (Non- Core Competencies)
Team/Individuals
Technological
MA/JVs (External Growth)
_____ Source Barry A. Macy, Successful
Strategic Change, Berrett-Koehler Publishers, San
Francisco, CA. (forthcoming)
4
Mergers and Acquisitions Three Types
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
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
Takeover
An acquisition where the target firm did not
solicit the bid of the acquiring firm
5
Remember Approximately 85 Of all MAs
are FAILURES!! (Why?)
6
Strategic Alliance Model The Five Most Frequent
Types of Alliances/MA
Competitors
Key Suppliers
Retail Store Or Large
Preferred
Consumers Customer Accounts
Firm
Supply Chain
Demand Chain
7

• QuestionIn what world region MAs perform well?
• North America
• Asia
• Europe

8
Problems in Achieving Success
Reasons for Acquisitions
9
Reasons for Acquisitions
Example British Petroleums acquisition of U.S.
Amoco
Example Belgian-Dutch Fortis acquisition of
American Bankers Insurance Group
Example Watson Pharmaceuticals acquisition of
TheraTech
10
Reasons for Acquisitions
Example Kraft Foods acquisition of Boca Burger
Example CNETs acquisition of mySimon
Example General Electrics acquisition of NBC
11
Problems with Acquisitions
Example Intels acquisition of DECs
semiconductor division
12
Problems with Acquisitions
Example Marks and Spencers acquisition of
Brooks Brothers
Example AgriBioTechs acquisition of dozens of
small seed firms
13
Problems with Acquisitions
Example Quaker Oats and Snapple
Example GE--prior to selling businesses and
refocusing
Example Ford and Jaguar
14
Attributes of Effective Acquisitions
15
Attributes of Effective Acquisitions
16
Case Example Sabre and Get There
17
MA Summary

• Current Dilemma in Creating Profitable Growth
• High Failure Rate of MA
• Tempting to focus on what is wrong with MA and
  pass on acquisitions
• Approximately 85 of all MAs are failures
• Organic (internal) growth is hard
• Most companies have to grow externally to meet
  shareholder expectations.

18
MA Summary

• Questions Managers Should Ask About MA
• What are the common denominators of companies
  that are successful at MA?
• How do successful companies organize and approach
  MA?
• Are these methods transferable to other firms?

19
MA Summary

• Bain Co. Study
• 724 publicly held U.S. firms
• Measured performance over 15 year period
  1968-2001
• Compared firms behavior across 7,476
  acquisitions to the excess return they provided
  to shareholders

20
MA Summary

• Key Findings of Study
• Bank on Experience
• Frequent buyers outperform both non-buyers and
  infrequent buyers
• Think Small
• Shareholder returns are negatively correlated
  with deal size
• Small MA deals are most successful

21
MA Summary

• Key Findings contd
• Dont assume home runs
• Do not put all of your eggs in one basket by
  only doing a few big MA deals
• Buy in fair and foul weather
• Develop a rigorous program of MA and stick to it
• Constant buyers are most successful

22
MA Summary

• Key Findings (contd)
• Reinforce MA commitment
• Frequent buyers succeed because they are
  organized and have institutionalized disciplines
• There is no magic in making MA deal work
• Firms that are successful at MA make it an
  integral part of their strategies and support MA
  just as they would any other core competency

23
MA Summary

• How to Succeed at MA
• Get in the game, start small, ramp up
• Frequent acquirers outperform other companies
• Firms that focus on small deals (less than 15 of
  buyer size) have the highest returns
• Combining deal frequency (high vs. low) with deal
  size (big vs. small) forms 5 strategic approaches
  to MA

24
MA Summary

• 5 Approaches to MA
• Mountain Climbing
• Frequent acquirers that start with small deals
  and ramp up to larger ones
• Stringing Pearls
• Frequent acquirers that focus on small targets
• Betting Small
• Infrequent acquirers that set their sights on
  small targets
• Rolling the Dice
• Infrequent acquirers that make a few big bets
• Playing Dead
• Firms that do not do MA

25
MA Summary

• 5 Approaches to MA (contd)
• The worst strategy is Rolling the Dice
• Most firms that make a few big bets, are
  infrequent acquirers with no MA experience
• Like putting a teenager behind the wheel of an
  18-wheelerlittle mistakes can be devastating
• Difficult to integrate with larger targets
• The best strategy is Mountain Climbing
• Frequent buyers work their way up from small to
  large firms and gain experience on the way

26
MA Summary

• How to Succeed at MA
• Avoid Rookie Mistakes
• Acquire companies that best fit your
  organizations strategy
• Do not buy firms just because they are available
  or look cheap
• Consult the frontline managers
• These are the people who can best assess the
  quality of the target and will be responsible for
  the new firm
• Develop a planned process for MA
• Helps avoid deal fever

27
MA Summary

• How to Succeed at MA (contd)
• Use Dollar Cost Averaging
• Constant Buyersbuy consistently through all
  economic cycles
• Recession Buyersincrease frequency of buying
  during recessions
• Growth Buyersbuy mainly during economic growth
• Doldrums Buyersbuy in stable periods between
  recession and growth

28
MA Summary

• How to Succeed at MA
• The most successful strategy is the constant
  buyer
• These firms buy high and they buy low
• Similar to the way dollar cost averaging is
  treated in mutual funds
• Always on the hunt for deals.

29
MA Summary

• How to Succeed at MA (contd)
• Get on the Learning Curve
• Start with small, low risk deals and build MA
  capabilities
• Institutionalize MA processes
• This helps the firm to quickly recognize
  strategically fit deals, evaluate them, seal the
  contact, and integrate the acquired company
• Create a feedback loop to learn from mistakes

30
MA Summary

• How to Succeed at MA
• Build a Standing Deal Team
• Maintain an experienced core MA team
• This team serves as a firms institutional memory
  bank as members learn lessons from each deal
• Deal team members are in charge of the entire
  purchasefrom screening to due diligence
• Core deal team should stay involved in
  integration
• Company should do post-mortem after every MA to
  update deal guidelines and learn from mistakes

31
MA Summary

• Deal Teams at Clear Channel Communications
• Clear channel has a central MA team at its
  company headquarters
• 3 person team that imposes clear criteria for
  every purchase (Problem!)
• Local MA teams in each of its three major
  divisionsradio, outdoor displays, and
  entertainment
• Work with line management to look for and
  evaluate deals
• Are in the best position to size up prospects and
  evaluate synergies according to central team
  criteria

32
MA Summary

• How to Succeed at MA (contd)
• Pull in Line Management Early and Often
• These are people that will be responsible for
  integrating and running the acquired business

33
MA Summary

• Line Management Involvement at Washington Mutual
• 6 member core deal team picks and analyzes
  acquisition prospects
• Deal team seeks advice and help from business
  unit leaders who know operations best
• This collaboration helps ensure that the right
  decisions are made at the right price
• Kick starts integration
• Early understanding and buy-in from business units

34
MA Summary

• How to Succeed at MA (contd)
• Find Ways to Kill Deal Fever
• Be prepared to walk away from a bad deal
• Insist on high-level management approval for all
  MA
• Use a compensation system to ward off
  ill-considered acquisitions
• e.g. Clear Channel ties its MA teams pay to the
  contributions that acquisitions make to the
  firms financial performance
• Set a walk-away price

35
MA Summary

• CintasSuccessful Frequent Buyer
• Cintas has supplemented its internal growth with
  the acquisition of hundreds of companies
• Over the last 5 years, the firm has spent 3
  billion on more than 250 acquisitions, driving
  40 of its topline growth
• Cintas is the market leader and revenues have
  risen over 20 per year to 2.3 billion in 2002

36
MA Summary

• CintasSuccessful Frequent Buyer
• Cintas CEO Robert Kohlepp states
• Success depends on three things top and line
  management involvement, institutionalizing the
  process of making acquisitions, and being willing
  to pass up a bad deal.

37
MA Summary

• Problems with Acquisitions
• Only a financial team assembled and they make
  the decision
• Should have two teams
• One financial and one organizationalwhere the
  organizational team says Yes or No
• A firm should maintain a core MA team to deal
  with all aspects of a purchase

38
MA Summary

• Problems with Acquisitions
• Integration Difficulties
• Differing financial and control systems can make
  integration of firms difficult
• Deal Smarts authors recommend involving line
  management at an early stage to help with
  integration
• Also discuss the need for an integration team to
  help make the transition smooth

39
MA Summary

• Problems with Acquisitions (contd)
• Inadequate Evaluation of Target
• Winners Curse bid causes acquirer to overpay
  for firm
• Article recommends developing a structured
  process for MA and maintaining an experienced
  deal team in order to avoid deal fever
• Managers Overly Focused on Acquisitions
• Managers may fail to objectively assess the value
  of outcomes achieved through the firms
  acquisition strategy
• This can be overcome by requiring high-level
  management approval for MA and by tying
  compensation systems to acquisition performance

40
MA Summary

• Problems with Acquisitions
• Too Large
• Large bureaucracy reduces innovation and
  flexibility
• The best strategy is mountain climbing
• Start with small deals and move up to big ones
• The larger the target, the more difficult it will
  be to integrate