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G3_Growth through Acquisition (Why firms overpay for acquisition (Moral…
G3_Growth through Acquisition
Growing through acquisition
Merger and Acquisition
More and more firms take this action
ex: Microsoft-Skype, Disney-Pixar...
A very common way to "Growth" or "Diversification"
Aid a consolidation strategy
Unique and significant capital budgeting decisions
No dry run
Substantial exist cost
Complex management
Pros and Cons of Acquisition
Potential Pros
Bring down high entry barriers
Increase entry speed
Acquire intangible assets
Customer loyalty, Brand
Avoid uncertain and risk of internal development
Potential Cons
Synergies do not exist
Difficult to integrate companies
Over leverage
Financial difficulties
Overpaying
Caution
Most acquisitions failed
Why do they failed?
Why do firms still attempt to acquisition?
Avoiding Overpaying
Does the value creation potential exceed the Acquisition costs?
Purchase Price
Other suitors? Avoid bidding wars!
Take into account "success" cost
Acquisition Analysis: Opportunity Costs
Increasing M&A success
Keep debt low to moderate
Focus on competencies and knowledge(how will the a.c. increase the value your competitive position?)
"Date before marry" (use alliances)
Work hard on integration (don't underestimate the difficulty!)
Be friendly, not hostile
Evaluate targets inside and out
Assume high probability of failure
Alternatives to Acquisition
why
It's typically unsuccessful
How
Innovation
Alliance
Scaling
Alliance
Disadvantage
Revenue sharing
Share control
Advantage
Complementary
Investigate
Flexible partnership
Identifying Successful Acquisition Opportunities
Pitfalls of Growth Through Acquisition
Often fails, especially mid-market
Why
Wrong target in the first place
Two sides don’t go well
Business models are incompatible
Rationale for acquisition is nonsensical
Hard to implement the merger
Easy on paper, difficult in practy
Ex: American Airline & US Air
Frequent flyer programs
Integration of reservation system
Reason: have difficulties in the post merger integration
or the implementation of the acquisition
Overpayment
Overpay for acquisition target and reduce the valuel
Ex: Daimler-Benz buy Chrysler
Never realized strategies benefits from merger
Acquisition analysis & Strategic benefit: Value of Target
Conceptually : Does the value creation potential exceed the acquisition costs?
worst scenario into consideration
Cost benefit analysis
Strategic benefit
Efficiency or complementarity gains
eg. Disney
eg, Pepsi
Market consolidation, diversification
eg. Cemax
Value of Market
Independent value + Value added
Why firms overpay for acquisition
Moral hazard
Firms don’t earn value, intermediaries do
Agency problem
By managers’ own self-interest
The winner’s curse
Like a auction
Escalation of commitment
