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(G1) [BGS] (week3) Growth through Acquisition (11.Team Members (Cindy,…
(G1) [BGS] (week3) Growth through Acquisition
11.Team Members
Cindy
Joanna
May
Miki
Jamie
Andri
2.Pros and Cons of Acquisitions
pros
overcome those high entry barriers
acquire intangible assets
facilitate a faster market entry
avoiding some of the uncertainty and the risk
cons
potential synergy just doesn't really exist
over leveraged
difficult to integrate the two companies
overpaying for the acquired firm
1.M&A
Merger
Two firms agree to integrate their operations on a equal basis
Acquisition
One firm buys another firm and then makes the acquired firm a subsidiary
Different take over ways
Friendly
The target firm solicits an offer from the acquirer
Hostile
They haven't necessarily solicited
Acquisition example
Pepsi Co
Bought Gatorade, Quaker and Tropicana orange juice
Good profit
Follow the trend
Health
American Airlines- US Airways (2013)
Become the largest airline in the world
Disney - Lucas Film (2012)
A common way of growth strategy
Help to consolidate
Involve big and unique capital budgeting decisions
Substantial exit costs
Like start a new business
No dry run
5.Alternatives to Acquisition
Acquisition
Attempted, but unsuccessful
Destroy value
Costly bad mergers
Alternatives
Scaling
Scale business operations (Eg. Retail business)
Internal development (Innovation)
Innovate our capabilities
Alliance formation
Strategic alliances
Advantages
Less resource intensive than M&A
Access partner's complementarities
Many forms from straight forward to more complex (Marketing partnerships to freestanding joint ventures)
Utilize partner's capabilities
Disadvantages
More complex than an arms-length contract
Revenue sharing (Dividing the gains)
Staring control (Risk of goal incompatibility)
4.Why Firms Overpay for Acquisitions
moral hazard
gain a lot of fees from facilitating those transactions
agency problem
pursuing growth
it's in their own self-interest
more recognition that comes from leading a larger enterprise
leading a larger institution
winner's curse
more likely to overpay for that acquisition
escalation of commitment
rationalize past behavior
7.Acquisition Analysis
The benefits have to exceed those costs.
Strategic benefit
Just like efficiency gains or complementarity gains
Pixar and Disney
Consolidate the market
These might be prohibited by regulations and by governments.
Diversify risk
Cemex
6.Identifying Successful Acquisition Opportunities
capabilities
A valuable competitive position
We needs to make position more valuable
opportunities
value
Start with values as an organization
The combination between what are the opportunities to create value for new customers
The most basic things is step back and ask ourselves
3.Pitfalls of Growth Through Acquisition
Why do they fail?
Difficulties in implementation
Overpayment
Premium
Exaggerated benefits
Reduce the value of acquiring firm while shareholders of target firms gain
Wrong target
Business model incompatibility
No synergies
8.Strategic Benefit: Value of the Target
The independent value of that potential target
The value added as part of the acquisition
Needs to be worth more than the sum of the parts
10.Acquisition Analysis: Opportunity Costs
Strategic benefit
Independent value + value add
Opportunity cost
Different route
Different strategic objective
Strategic benefit - Purchase price > Opportunity cost
Increasing M&A success
Use alliances
Keep debt low to moderate
Be friendly
Focus on core competencies & knowledge
Evaluate targets inside & outside
Work hard on integration
Assume high probability of failure
9.Avoiding Overpaying
Concept:Does the value creation potential exceed the acquisition cost?
Acquisition biggest cost:purchase price
Other suitors?
Success cost
Eg:American Airline/US Air