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G2 - [BGS-3] Growth through Acquisition (M&A (Pros # (Increase entry…
G2 - [BGS-3] Growth through Acquisition
M&A
Pros
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Increase entry speed
Acquire intangible assets
insurmountable entry barriers
Avoid uncertainty and risk of internal development
Cons
Difficult to integrate companies
Become highly leveraged
Synergies do not really exist
Overpaying for acquired firm
aid a consolidation strategy
might be driven by the attempt to consolidate or roll up the industry and eliminate some of the competition
involves significant and unique capital
budgeting decisions
substantial exit costs
dollars
reputation
Alternatives
internal development
innovating our own new capabilities or products or services
strategic alliance
pros
potentially less resource intensive than M&A
access partner's complementarities
many forms, from starightforward to more compex
utilizes partner's capability
cons
revenue sharing
sharing control (risk of goal incompatilbility)
more complex than an arms-length contract
serve as a precursor to an eventual merger or acquisition
some ongoing interaction among independent parties that have agreed to commit resources to some sort of joint activity for a certain period of time
Scaling
just doing more of what we already do
EX:opening new restaurants in new locations
acquisition analysis
Opportunity Costs
Strategic Benefit
Efficiency or complementarity gains
Market consolidation, diversification
Purchase Price
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increase M&A success
“Date before you marry”, i.e., use alliances
Keep debt low to moderate
Be friendly, not hostile
Focus on core competencies and knowledge
Evaluate targets inside and out
Assume high probability of failure
Work hard on integration
Why is it that acquisitions so often fail
Difficulties in implementation
post-merger integration challenges
easy "on paper"
Overpayment
moral hazard
creates value for the investment banks and the other financial industry.
agency problem
increase managerial compensation
the individual managers and decision-makers involved have something personally to gain
the winner’s curse
pay more than the item is worth
escalation of commitment
Selective attention to supporting information
Rationalizing past behavior
Pre-existing bias distorts perception of information
when in a competitive situation, giving up means we lost
managers are ego
Wrong target
"bad marriage", no obvious synergies
between 70 and 90% of acquisitions that end up failing
strategic benefit-purchase price > opportunity cost
Independent Value+Value Added
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