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[ASM] G2 - Grow Through Acquisition (BGS) (Ways to Increase M&A…
[ASM] G2 - Grow Through Acquisition (BGS)
Introduction
Merger and Acquistion
a big part of the global economy
Two firms agree to intergrate their operation
One firm buy other and makes the acquired firm a subsidiary
Some firms take this methods
AT&T/American Airline/Disney
They are the common method of Growth and Diversification
no dry run
sunbstantial exist cost
managing integration is extremely complex
Pros & Cons
Advantages
Overcome insurmountable entry barriers
Increase entry speed
Acquire intangible assets
Avoid uncertainty and risk of internal development
Disadvantages
Synergies do not really exist
Difficult to integrate companies
Highly leverage
Overpaying for acquisition
A firm should be cautious of acquisition
(CBS) 50%-80% fails
(Harvard) 70%-90% fails
(Forbes) 50-50
Destroy firm's value
Pitfalls
Difficulities in Implemantation
Overpayment
Wrong Target
Reasons why overpay
Moral hazard
transaction intermediaries
fees for M&A services are attractive to investment banking industry
drive the tendency to acquisition
giving some wrong information
Agency problem
self-interest
increase compensation
lead a larger institution
gain more recognition
Winner's curse
being too optimistic about self-management
who offers the highest price wins
the actual value is close to the average price
sort of an auction
bidding
Escalation of commitment
ex.
can't refund your movie tickets
choose to watch a movie you don't like
poor performance
managers don't want to admit their wrong decision
rationalize it but not change it
Alternatives
Why do we seek for the alternatives?
Acquisitions are often attempted, but typically unsuccessful.
Bad mergers are costly.
On average, most acquisitions destroy value for the acquiring firm.
What are the alternatives?
Scaling
Geographically expand
Internal development( innovation )
The original Valuable Competitive Position might be replaced
Alliance formation
Alliances
Advantages(compared with acquisition)
Many forms, from straightforward( R&D or marketing partnerships) to more complex(freestanding joint ventures)
Potentially less resource intensive than Merger&Acquisition
Access partner's complementarities
Utilizes partner's capabilities
Disavantages(compared with acquisition)
More complex than an arms-length contract
Revenue sharing(dividing the gains)
Sharing controls(risk of goal incompatibility)
Opportunities Identify
Any potential acquisition should be able to help maintain or advance the
valuable competitive position
Analysis
Taking the worst scenario into consideration
Equation
Strategic Benefits
Market consolidation
: Reduce rivalry
Diversification
: Risk hedge of market fluctuation
Realize integrated value
Efficiency or complementarity gain
Purchase Price
Taking
all costs of successful acquisition
into consideration
Offering premium cannibalize potential value we can create
Beware of bidding war with other suitors
Opportunity Cost
The targets we pursue is the best to us(in money, resources)
Benefits need to outweigh costs and the alternative we might purse
Pursing better strategic objectives if we have
Strategic Benefits
-
Purchase Price
>
Opportunity Cost
Need to consider all cost may incur not just purchase price
A cost benefit analysis
Ways to Increase M&A success
Use strategic alliance before M&A
Not to over-leverage
Be friendly rather than hostile
Focus on core competencies, knowledge to advance valuable competitive position
Evaluate targets inside and out
Work hard on integration but not to underestimate difficulties
Assume high probability of failure