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〔ASM〕G4-BGS-Growth through Acquisition (Why Firms Overpay for Acquisitions…
〔ASM〕G4-BGS-Growth through Acquisition
Why Firms Overpay for Acquisitions
Escalation of commitment
Final
Give up in the competition
Initial
Pre-existing bias distorts perception of information
Thinking merger beneficial for the firms then committed to continuing this path
Who
The management
The core idea
Selective attention to information
Moral hazard
Why
Gain fees
Who
Transaction intermediaries/ex.Investment bank
Winner's curse
Winner pays the highest price than item actual value
Competitive bidding situation
Agency problem
Why
Self-interest motivation
Increase compensation
More legitimacy/recognition
Advantage of leading a larger institution
Who
The managements of acquiring firm
Alternatives to Acquisition
Acquisition
attempted, unsuccessful
Destroy VAlue
Bad mergers
money
resources
reputation
Alternatives
Scalling
existing business
ex retail business
internal development
certain products
capabilities
brand recognition
organically develop
Alliance Formation
strategy Alliance
independent parties
commit resources
certain period
Advantage
R&D
a marketing partnership
distribution arrangement
freestanding joint venture
resource intensive
Disadvantage
more complex
Revenue Sharing
sharing control
Identifying Successful Acquisition Opportunities
Successful acquisition
Create more value together than they were separate
Maintain or advance your valuable competitive position
Introduction
EX: Pepsi buy the gaps & quaker
Merger& Acquisition
Pros& Cons of acquisition
Pros
Overcome entry barriers
Increase entry speed
Acquire intangible assets
Avoid risk of internal development
Cons
Overpaid for acquire firm
became highly leveraged
Hard to integrate companies
Synergies doesn't really exist
Most mergers are "fail"
Why do they fail?
Its easy to fail, but why mergers are common?
Pitfalls
Wrong Target
Business models are incompatible
No obvious synergies
Overpayment
too optimistic about the benefits
A common problem in acquisitions
Difficulties in implementation
Company culture, IT system, personnel organization
Integrate the two companies afterwards
Strategist's Toolkit
Acquisition Analysis
A cost benefit analysis
Is there a benefit?
Does benefit potentially outweigh the costs?
Is there a good reason?
Benefits
Diversify risk
Ex: Cemex
Consolidate the market
Usually prohibited by government
Efficiency or complementarity gains
Ex: Disney acquiring Pixar
What's the costs?
Integration
All of that you might need to incur to make acquisition
Potential offer price
The elements of acquisition analysis
1.Strategic Benefit: Value of the Target
Value added
Acquisition should bring more value
Independent value
2.Purchase Price
Considering other suitors
Taking the potential costs of success into account
3.Opportunity Costs
The net benefit of alternative strategies v.s The net benefit of acquisition
Suggestion
Assuming high probability of failure
Be friendly to the target firms
Using alliance to test
Be aware of the debt
Focus on the core competencies
Team Members
Flora
Willy
Vendy
Iris
Sharon
Debby