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SMMCG1[CS-2]Corporate Transactions, G1 (Vivianna, Brianna, Susan, Lee, Tim…

- - - - What is Mergers &Acquisitions (M&A)
        
        Purchase or takeover
        
        Combing two companies
    - - Value goes to the target
      - Destroyed Value
    - - Tax reasons
      - new markets
      - new technology
      - capability
      - well honed acquisition
        and integration capability
        
        a relatively low premium
        
        To
        
        integrating them and creating value
      - protect manager
        
        hubris
    - - Good company
        
        market valuation of company already be quite high
        
        risk-weighted cost of capital
        
        Winner's curse
        
        how to avoid
        
        Amazon-Whole Foods
  - - - Synergies
        
        Leveraging strategy
        
        applying the acquirer's capabilities
        
        e.g. Amazon's purchase of Whole Foods
        
        Limited synergies
        
        value-destroying for shareholders
        
        Stretching strategy
        
        helping the acquirer develop new capabilities
        
        e.g.Salesforce's acquisition of Tableau
        
        if there are capabilities-based synergies, they can create a value surplus in the M&A
      - Private equity
        
        unlikely to tap into any resource synergies
        
        how could they possibly be creating value?
        
        taking on a lot of debt
        
        identify targets that might be undervalued by the market
        
        bring in better management
        
        have a thesis about how the target firm's value can be improved
    - - it is not uncommon for mergers to fail because post-merger integration is difficult, or poorly prepared for, or poorly executed
      - Skilled acquisition and integration as a key to success in M&A
      - focusing on evaluating the target, ensuring the synergies are there, planning for post-merger integration, and faithfully executing the integration plans.
    - - just taking things at face value
        
        acknowledging the highlights
        
        dig for what are the opportunities for improvement
      - stopping at the easy answer or not getting a number of different opinions in the work
        
        pressure testing
        
        being open to team members
      - post-merger integration
        
        undermanaging
        
        Putting 80% of the energy on that 20% is going to do it
        
        overmanaging
  - - - Overcome entry barriers
      - 2.Increase speed to entering market
      - 3.Increase market power
        
        Increase revenue,
        Rduce risk and costs
      - 5.Lower costs and risks (new products development)
      - 4..Increase diversification
    - - 1.Different culture
      - High turnover of the management skill
      - 3.Asymmetric information
      - Synergies don't materialize
    - - 1.Is that going to create more valuable synergies than two businesses separately?
        
        Something was really far from core capability,
        and that can either be technically or geographically far from home.
      - 2.Is this value not dissipated by the cost of acquisition?
      - 3.Do you have a strong, credible post-merger plan for realizing the synergies?
    - - Complementary resources and capabilility
      - 2.Objective evaluation and bidding
      - 3.Maintain financial slack
      - 4.Well-managed implementation plan
- - - - ITT
        
        Xylem
        
        Exelis
        
        distributed their shares to shareholders
        
        Create the most
        
        the largest transactions
        
        largest unit
        
        No
        
        Sell Exelis to another firm
        
        about the same increases
        
        the firm's stock market price increases
        about 1.2~1.3% on average
        
        slowest
        
        IPO
        
        Yes
        
        1 more item...
        
        fastest
        
        Smaller units
        
        most common divestiture mode used
        
        Yes
        
        Sold 40% of the shares in Xylem through an IPO
        
        pocketed the cash
    - - the parents shareholders are given the option to exchange their share for that of the unit
  - - - IPO involved
      - the parents still retains more than 50% ownership
        
        parents can still have effective control
  - - - unit sales
        
        stock market reaction to divestiture announcements
        
        get the biggest stock market bump relative to firms that are not financially distressed
      - carve-outs
    - - unit has significant exposure to lawsuits or damages
  - - - selling non-core business units
        
        result in a more positive stock market reaction
      - free up entrepreneurial or innovative potential within a unit
        
        may otherwise get stymied within a large corporation
      - free up resources and capabilities
        
        for redeployment and create space for new businesses
      - how companies may fail to commercialize their innovations, leading to missed opportunities?
        
        divestitures can boost a unit's innovation
        
        particularly for spin-offs.
        
        Xerox PARC
        
        never successfully commercialized most of these innovations
        
        other companies took these ideas and built entire businesses on them
        
        hiring people out of Xerox PARC who had worked on the innovation there
        
        key factory
        
        freedom to pursue new and different business models is crucial for success
    - - Have clear goals for divestiture
        
        make decisions accordingly
      - Consider division of resources between parent and unit
        
        find creative solutions when relevant to both
      - Being open to divesting units
        
        constantly evaluate potential units for divestment
      - Pay attention to post-divestiture governance of the domestic unit
        
        encourage autonomy and enterprise
      - be a valuable tool for companies
        
        refocus their core businesses
        
        create room for new businesses
        
        free up entrepreneurial and innovative potential
- - - - long-term contract for services or products from another company.
    - - contractual arrangement for access to technology, typically in exchange for royalties.
    - - strategic alliance where at least one firm invests in the other.
    - - strategic alliance that establishes a new separate legal entity that firms co-invest in.
        
        joint ventures as a separate entity co-owned by alliance partners.
  - - - Challenges
        
        Mutual exposure of technologies, capabilities, and markets
        
        Learning races between partners
        
        Coordination issues with joint investments, risks, and responses
        
        Conflict, opportunistic actions, and dispute resolution
        
        Transaction costs, adverse selection, moral hazard, and hold-up problems
  - - - Shared vision for the purpose of alliance
        
        Bad partner
        
        No clear ideas
        
        Eg. And The Ship Sails On (1983)
        
        No effort for alliance
        
        Only take most of the benefit
        
        Good partner
        
        Help all participants advance their strategic goals
        
        Everyone will get a fair share of the value that's being created.
        
        Have complementary assets
        
        Contribute valuable assets and resources to alliance
    - - Build and Reinforce trust which supports relational governance
      - 2. Re-evaluate
        
        The alliance still provides strategic overlap
        
        Your partner still
        contributes valuable resources that you need
      - Exit the alliance
        
        An alliance can no longer be adapted to
        your needs
    - - Contractual Terms
        
        Include ideas that expected both sides to meet these specific terms
        
        If they don't, they can be taken to court to ensure that the terms are met.
        
        Credible Commitments or Self-enforcing contract
      - Manage Risk, Opportunism, Conflict
        
        Contractual safeguards
        
        Seeking credible commitments
        
        Walling off key technology
        
        Agreements and governmance
- - - - corporate trasaction are critical dimension of corporate startegy
      - A portofolio view of corporate trasaction view of corporate transaction is helpful
      - Diverstitures and alliances create value if managed well
- - - - manage the scope of the firm
        
        Decrease
        
        Divestitures
        
        ADD
        
        Alliances
        
        Mergers and acquisitions
- - - - Cash received

Recap of advantages and benefits of strategic alliances

Emphasize the importance of effective management and addressing challenges