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SMMCG2[CS-2] Corporate Transactions, G2 (Sarah, Kelly, Cindy, Emily Wu,…
SMMC
G2
[CS-2] Corporate Transactions
Definition
Always involves another firm
Including merges, acquisitions, divestitures , alliances and contracts
View as a portfolio within the company, not piecemeal events.
Involve change of firm's scope
M&As
Actual extend firm's scope
Alliances, contracts
Technological change in firm's scope
Mergers and acquisitions
Mergers
Combine two companies that are roughly of a similar standing(size, valuation)
Friendly approach
ex. Amazon buy Whole Food
Acquisitions
Outright purchases or takeovers of another company
Unfriendly(hostile takeover)
Occurs when directors must consider acquisitions for the benefit of shareholders
ex.Broadcom &Qualcomm
Friendly
M&As
Acquire
Target
Need to provide Target's shareholders with better deals.
Stock price dropped because of excessive premium for Target.
Taeget performs well in stock
Diversification discount
May ending up destroying value
Advantages
Get into new market and get access to new technology
3.Overcome competitive disadvantages
Superior acquisition& integration capabilities
Disadvantages
1.Principle-agent problem
Manager of hubris
Create synergies
Helping the acquirer develop new capabilities
Enhancement / Stretching strategy
Applying the acquirer's capabilities to the target's business and create more value
Leveraging strategy
Leveraging create better value than stretching
Capabilities-based synergies, create a value surplus in the M&As
How to create value
Identify targets that might be undervalued by the market
A thesis about how the target firm's value can be improved
Post-merger challenges
Avoid
A deal making mentality
Not focus on simply buying the other company
Focus on
Evaluating the target
Ensuring the synergies are there
Planning for post-merger integration
Faithfully executing the integration plans
Three-part test
Well-managed M&As
Clear identification& quantification
Objective evaluation and bidding
Having some financial slack
Well-managed implementation
Does the M&As have potential for creating synergies?
Whether the potential synergies can be at least partly captured?
Having a strong , credible post-merger plan for realizing the synergies?
Divestitures
Definition
Transactions that essentially break up and separate a business from a company
Divest mode(ways to divest)
Reasons for divestiture
Reduce risk and liability
Refocus on core businesses
Lack of strategic fit (low synergies)
Free up to entrepreneurial / innovative potential
Low profitability of unit
Raise cash for parent
Carve-out
Parents sells part of its ownership in a unit
retains more than 50%
Effective control
slowest to execute
Sales of unit business
Sales of a unit to another firm
For cash compensation
fastest to execute
about the same increases stock market price
Spin-off
Business unit is separated completely
Shares are distributed to the parent shareholders
Create most value
How to manage
Identify the right divestiture mode
Ensure units have the right resources
Clear about the goal
Pay attention to post-divestiture governance mechanism
Open to divesting their units
Strategic alliances
Licensing
Contractual arrangement for access to technology
Equity alliance
Strategic alliance where one firm invests to another
Relational contract
Long term contract for services or products from other company
Joint venture
Strategic alliance that establishes a new separate legal entity
The reasons
The problems
Managing joint investments, risks, responses
Gain access to capability, technology, and markets
Having conflicts, opportunism, and disputes
Transaction costs
Accessing capabilities or market quickly
Reducing asset commitment and increasing innovation
Learning from partners
Sharing cost, risks, and rewards
Building cooperation
Three keys to work effectively
Alliance structure
Managing alliances
Partner selection
A portfolio view
Two effects
Intertemporal effects
Inter-unit resources re-deployment
Real options for future transactions
Creating and feeling-up redeployable resources
Corporate transaction capabilities
Learning and capabilities augmentation
Contemporaneous effects
Complementarities or synergies or resource re-deployment opportunities
Inter-organizational networks that a company can build through its alliances or partnerships.
G2
Sarah
Kelly
Cindy
Emily Wu
Emily Huang
Elaine