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Chp 7 Mergers and Acquisitions Part 1 (Reasons for an acquisition…
Chp 7 Mergers and Acquisitions
Part 1
Definitions
Merger
Two firms agree to integrate their operations on a relatively co-equal basis.
Acquisition
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
An acquisition in which the target firm did not solicit the acquiring firm’s bid for outright ownership.
Modes of diversification
Acquisition
Pro: It's quick
Cons: to pay an acquisition premium, have to internalize firm
Joint venture / alliances
Pro: Complementary resources, economic
Cons: Difference in goals may be present, diff to control, knowhow lost to partner
Internal venturing or organic growth
Pro: Profit option
Con: Slow, uncertain, might be haphazard
Licensing out
Pro: Ease, speedy
Cons: Milking rather than growing position
There exists high acquisition failure rate (on average, 53% - 60%)
Research on modes of entry / expansion
Entry
But in Canada, Canadian firms prefer starting from scratch (new plant / greenfield) while foreign firms prefer acquisition
generally considered: faster & less risky mode of entry
Expansion by firms already in industry
Acquisitions slightly more important than greenfield here
Greenfield entrants less than 1% employment at entry, 50% mortality by year 10, those that survive account for 16% of industry shipments by year 10. relatively slow steady growth among survivors
Acquisition entrants less than 1% employment at entry, 50% mortality by year 10, those that survive account for 11.8% of shipments by year 10. relatively volatile growth among survivors, often growth then decline - but important in breaking static patterns in highly concentrated industries
Reasons for an acquisition
Increased
market power
Overcoming
entry barriers
Cost of new
product development high
increases speed to market
Lower risk than developing new
products
Increased
diversification
Reshaping firm’s
competitive scope
learning and developing new capabilites
Types of Acquistions
Horizontal acquisitions
Acquiring a firm in the same industry, increases market power by
revenue based synergies
Cost based synergies
acquisitions with similar characteristics result in higher performance
Vertical Acquisition
Acquisition of a supplier or distributor
increases a firm’s market power by controlling additional parts of the value chain.
Related Acquisitions
Acquisition of a firm in a highly related industry
Problems in Acquisition Success
Integration
difficulties
Inadequate
target evaluation
Extraordinary debt
Inability to
achieve synergy
Too much
diversification
Managers overly focused on
acquisitions
Too large
Challenges in managing acquisitions
Keeping own firm's strategy consistent
Capability to integrate
Capacity for learning (other org's culture, ways etc)
Quality of acquisition decision making
Obtaining input from operations into decision
The acquisition process
Idea
Mainly Decision making process problems
Key Players (typical)
Top management
CFO
Legal
Corporate Strategy
Acquisition justification
Similar problems and key players as step 1
but might also have Integration Process Problems
Acquisition integration
Integration Process Problems
Key Players (typical)
Division head
Operational units
there might be lack of adequate communication between the following key players and those involved in the step 1 (idea)
Results
(value creation / destruction)
Dimensions of acquisitions
Haspeslagh & Jemison 1991
types of corporate strategy goals
Domain strengthening: (augmenting capabilities in existing domains)
Domain extension: (applying firm’s capabilities to/from adjacent business)
Domain exploration: (moving into new business & capabilities)
types of business strategy goals
Acquiring a specific capability
Acquiring a platform
Acquiring an existing business position
Three modes of integration
Haspeslagh & Jemison 1991
Absorption
full consolidation of operations, organization & culture
consolidation: the action or process of combining a number of things into a single more effective or coherent whole.
Preservation
managing at arm's length to learn from acquired firm
Symbiotic
You decide where integration is needed to reach the objectives of the merger integration, there might be boundary preservation, creation and permiability
Refer to Appendix Insert 1 for diagrammatic positioning
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 firm’s executives.
loss of key personnel weakens the acquired firm’s capabilities and reduces its value.
Refer to Insert 2 in appendix for attributes of successful acquisitions
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