Mergers
and
Acquisitions
Merger
A strategy through which two firms agree to integrate their
operations on a relatively co-equal basis
Acquisition
A strategy through which one firm buys a controlling, or 100%
interest in another firm with the intent of making the acquired firm
a subsidiary business within its portfolio
Takeover
A special type of acquisition when the target firm did not solicit the
acquiring firms bid for outright ownership
Analysis
Target
Due
Identification
Diligence
Deal
Negotiation Closing
Announcement
Post Merger
Integration
Elements
of CS
Growth
Turnaround
M&A
Restructuring
Innovation
Cost new product
development/increased
speed to market
Increased
diversification
Acquisitions
Increased
market power
Overcoming
entry barriers
Avoiding excessive
competition
Lower risk
compared to
developing new
products
Learning and
developing new
capabilities
Factors increasing market power
When there is the ability to sell goods or services above
competitive levels
When costs of primary or support activities are below those of
competitors
When a firms size, resources and capabilities gives it a superior
ability to compete
Acquisitions intended to increase market power are
subject to:
Regulatory review
Analysis by financial markets
Market
power is increased by:
Horizontal acquisitions
Vertical acquisitions
Related acquisitions
Horizontal
Acquisition
s
Acquisition of a company in the
same industry in which the
acquiring firm competes
increases a firms market power
by exploiting:
Cost-based synergies
Revenue-based synergies
Acquisitions with similar
characteristics result in higher
performance than those with
dissimilar characteristics
Horizontal
Acquisition
s
Vertical
Acquisition
s
Acquisition of a supplier or
distributor of one or more of
the firms goods or services
Increases a firms market
power by controlling
additional parts of the
value chain
Horizontal
Acquisition
s
Vertical
Acquisition
s
Related
Acquisition
s
Acquisition of a company
in a highly related industry
Because of the difficulty
in implementing
synergy, related
acquisitions are often
difficult to implement
Factors
associated with the market or with
the firms currently operating in it that
increase the expense and difficulty faced by
new ventures trying to enter that market
Economies of scale
Differentiated products
Cross-Border
Acquisitions
Internal development of new products is
often perceived as high-risk activity
Acquisitions allow a firm to gain access to new
and current products that are new to the firm
Returns are more predictable because of the
acquired firms experience with the products
An acquisitions outcomes can be estimated
more easily and accurately than the outcomes
of an internal product development process
Managers may view acquisitions as lowering
risk
Using acquisitions to diversify a firm is the quickest
and easiest way to change its portfolio of businesses
Both
related
diversification
diversification
strategies
can
and
be
unrelated
implemented
through acquisitions
The more related the acquired firm is to the
acquiring firm, the greater is the probability that the
acquisition will be successful
An
acquisition can:
Reduce the negative effect of an intense
rivalry on a firms financial performance
Reduce a firms dependence on one or more
products or markets
Reducing
specific
a companys dependence on
markets
competitive scope
alters
the
firms
An acquiring firm can gain capabilities that the firm does
not currently possess:
Special technological capability
Broaden a firms knowledge base
Reduce inertia
Firms should acquire other firms with different but related
and complementary capabilities in order to build their
own knowledge base
It is the magic force that allows for enhanced cost
efficiencies of the new business. It leads to revenue
enhancement and cost savings. The companies benefit
from the following:
Staff Reductions
Economies of Scale
Acquiring new technology
Improved market reach and industry visibility
Too large
Acquisitions
Too much
diversification
Integration
difficulties
Inadequate
evaluation of target
Managers overly
focused on
acquisitions
Large or
extraordinary debt
Inability to
achieve synergy
Integration challenges include:
Melding two disparate corporate cultures
Linking different financial and control systems
Building effective working relationships (particularly when management
styles differ)
Resolving problems regarding the status of the newly acquired firms
executives
Loss of key personnel weakens the acquired firms capabilities and
reduces its value
Due Diligence
The process of evaluating a target firm for acquisition
Ineffective due diligence may result in paying an excessive
premium for the target company
Evaluation requires examining:
Financing of the intended transaction
Differences in culture between the firms
Tax consequences of the transaction
Actions necessary to meld the two workforces
High
debt can:
Increase the likelihood of bankruptcy
Lead to a downgrade of the firms credit rating
Preclude investment in activities that contribute
to the firms long-term success such as:
Research and development
Human resource training
Marketing
Synergy exists when assets are worth more when used in
conjunction with each other than when they are used
separately
Firms experience transaction costs when they use
acquisition strategies to create synergy
Firms tend to underestimate indirect costs when
evaluating a potential acquisition
Diversified firms must process more information of
greater diversity
Scope
created
by
diversification
may
cause
managers to rely too much on financial rather than
strategic
controls
to
evaluate
business
units
performances
Acquisitions may become substitutes for innovation
Managers
invest
substantial
time
and
energy
in
acquisition strategies in:
Searching for viable acquisition candidates
Completing effective due-diligence processes
Preparing for negotiations
Managing the integration process after the acquisition
is completed
Friendly merger: Offer made through the targets board of
directors.
Hostile merger: Offer made directly to the target shareholders
Managers in target firms operate in a state of virtual
suspended animation during an acquisition
Executives may become hesitant to make decisions with
long-term consequences until negotiations have been
completed
The acquisition process can create a short-term perspective
and a greater aversion to risk among executives in the
target firm
Additional costs of controls may exceed the benefits of
the economies of scale and additional market power
Larger size may lead to more bureaucratic controls
Formalized controls often lead to relatively rigid and
standardized managerial behavior
Firm may produce less innovation
A strategy through which a firm changes its set of
businesses or financial structure
Failure of an acquisition strategy often precedes a
restructuring strategy
Restructuring may occur because of changes in the
external or internal environments
Restructuring strategies:
Downsizing
Leveraged buyouts
Stock market
Activist shareholders
Pension funds
Increasing competition
Global
Technological
Change in regulation
Information gap
Slightly modified from the
McKinsey book.
Operating
improvement
Incentives
management with VBM
Divestiture
activity
Financial engineering: leverage,
dual class stock, carve outs,
tracking stock, employee
ownership, debt restructuring
Asset restructuring: These are the activities that are going to be done within
the legal structure of the firm. Could entail the details of the corporate
structure: divisions, subsidiaries, etc. In particular, acquisitions that are
diversification oriented are moving the corporation into new industries, etc.
Divestitures/spin off of divisions of a corporation alter the different businesses
the firm owns and operates in.
These activities operate in the work flow that go into the production of finished
products and services that can either be done within the corporation or can be
contracted
with
third
parties.
Examples:
outsourcing HR, licensing arrangements, etc.
Acquisitions
Divestitures
Spin offs
Corporate downsizing
Outsourcing
franchising vs.
ownership,