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[G5] Growth through Acquisition (Acquisition Analysis (try to determine in…
[G5] Growth through Acquisition
Pitfalls of Growth through Acquisition
Why acquisition is often fail?
Difficulties in the post merger integration or the implementation of the acquisition
Overpayment
Firms often overpay for acquisition targets
M&A reduces the value of the acquiring firm while shareholders of target firm gain
Acquisition "premium" + exaggerated benefit = disaster
The wrong target in the first place
Pros and cons of acqusition
advantages
overcome entry barriers
accelerate the speed of entry
gain intangible assets
fame,brand
avoid development risk and uncertainties
disadvantages
synergy does not exist
difficult to integrate
become highly leverage
Debt
overpaid
having 50%or more chance the acquisition might fail
Growing through acqusitioon
Uprising trend
definition
Merger
two firms agree to integrate equally
Acquisition
Acquirer buy the aquiree
takeover
Friendly
the target cooperate
Hostile
the target resist
Acquisition Analysis
try to determine in advance
if a particular acquisition is one that has high potential for growth and value creation
if it's an acquisition that is more likely to turn out to be problematic
acquisitions fail
the purchase price is too high
the acquiring firm overpays for the target
they're just simply never able to recover all of those costs and get the associated value out of them
we consider
if the potential strategic benefits outweigh the potential costs associated with making that acquisition
purchase price
Why firm overpay for acquisition?
Growth for growth's sake to increase managerial compensation
The winner of an auction may pay more than the item is worth
Fees for M&A services are very attractive to investment banking industry
Banks are incentivized to promote acquisitions, which can lead to lower quality deals.
What's known as escalation of commitment
There's sort of pre-existing bias distorts perception of information
we might rationalize past behavior
There's selective attention to supporting information
When we are in some sort of a competitive situation, giving up = defeat
The EGO involved in the executives
Identifying Successful Acquisition Opportunities
a valuable competitive position
articulate clearly how an acquisition will help you be able to further develop or defend a valuable competitive position
Acquisition analysis: Opportunity cost
Strategic benefit
Independent value
Value added
Equation
Strategic benefit-Purchase price>Opportunity cost
Alternatives to Acquisition
internal development
strategic alliance
ongoing interaction among independent parties that have agreed to commit resources to some sort of joint activity for a certain period of time.
potential advantages
utilize that partner's capabilities
access a strategic partner's complementarities
potentially less resource intensive
a precursor to an eventual merger or acquisition
Many form
R&D or a marketing partnership
freestanding joint venture.
potential disadvantages
share the revenue
share control
more complicated than an arms length contract
scaling
the biggest cost
purchase price
get the price right
other suitor
the cost of success
strategic benefits
efficiency / complementarity gains
improve cost structure / Disney + Pixar
market consolidation /diversification
horizontal acquisitions / scaled up through acquisition
independent value // integrated value