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CS-2 Corporate Transactions, starbucks and spotify, differences terms may…
CS-2 Corporate Transactions
Strategic Alliances
making alliances work
managing alliances
to bulid and reinforce the trust between alliances
learn their technique
partner selection
good partnership
to contribute towards the creation of value
ideally seek a different benefit from the other party
bad partnership
offer the oppsite effection as good partnership
alliances structure
credible commitments
hostages
equity stakes
sunk investments
contractual terms
the way of cooperations
warranties
purchase
reasons
learn from its partner and thus upgrade its own resources
doesn't want to shoulder all the costs and risks of new business opportunities
the rewards
would need to be shared
reduce each of their asset commitments
and maintain some flexibility
building a common technology
standard
access capabilities or markets more quickly and surely
the most common
one
problems
adverse selection
the choice of partner
the type of resources or assets contributed by the partner
moral hazard
the partner's performance of his responsibilities cannot be accurately or fully monitored
transaction costs
hold-up
often takes the form of opportunistic renegotiation
type
equity alliances
at least one firm invests in the other
joint venture
establish a new separate legal entity that firms co-vest in
resources
technology
human capital
licensing
contractual arrangement for access to technology
relational contract
long-term contract for services or products
Corporate Transactions
change the scope of a firm (both perspectives, not unilateral)
:heavy_plus_sign:
mergers and acquisitions
:heavy_minus_sign:
divestitures
similar to increase the scope :heavy_plus_sign:
contracts and alliances
three resources
:one:
annual BCG M&A report
analysis and research on M&A & divestitures
:two:
Institute for Mergers,
Acquisitions, and Alliances (IMAA)
statistics about M&A trends and graphs
:three:
Thomson ONE or SDC
Provide the complete data on M&A and
divestitures, but not so on alliances
Mergers and Acquisitions
difference
mergers
friendly
Combine two companies based on similar size or valuation
Ex:
By negotiating, Amazon bought Whole Foods.
acquisitions
friendly or unfriendly
Purchases completely or
takeovers of another company
Ex:
Singapore-based Broadcom plans to use $117 billion to buy US tech company Qualcomm without permission of Qualcomm's management.
create value?
target company
Target shareholders always get good deal because acquirer company need to give them a better price than in the stock market.
acquirer company
positive
stock price in short term
neutral
negative
The combined company is less valuable than the two companies separately in the long run.
Why companies do?
:two: Superior acquisitions & integration capability
Ex:
Cisco
integrating others companies at a
relatively low premium
and creating value from them.
:three: Overcome competitive disadvantages
Ex:
Tableau
's product is a direct competitor to
Microsoft
Power Bi software. In order for
Salesforce
to compete more effectively with Microsoft in
cloud software
. :cloud:
value destroying
the principal-agent problem
not necessarily just because of managers' own personal interest.
:one: Access new markets and technologies
Ex:
Salesforce
's acquisition of
Tableau
in 2019 for over $15 billion. But Tableau only reported $322 million in revenue in its last quarter before the merger.
:four: Good for manager & Managerial hubris
portfolio diversification ➡️ reduce their investment risk
not necessarily benefit shareholders
protect managers
Managerial hubris
the poor track record
Warren Buffett
master value investor
individual investors are not very good stock pickers
the market valuation of a good company should already be quite high.
can't really predict after adjusting for the risk-weighted cost of capital
Winner's Curse
occurs
have competitive bidding for a target company.
the winner in that bidding war has to pay the
highest
price on offer among all the bidders.
the winner is the
most optimistic
one
=
overvaluing
the target
winning firms are likely to
systematically pay too much
.
Amazon-Whole Foods merger
absolute secrecy
to avoid other companies getting wind of the merger and jumping into the bidding frame.
stipulated that they would not match other bidders.
Salesforce-Tableau acquisition
Tableau declined to give Salesforce
exclusivity
in bidding for the company
If Tableau decided to take an offer from another company.
500 million penalty
a poison pill
for any other acquirer.
A Portfolio View
intertemporal effects
one M&A or one alliance
:arrow_left: the basis of
capability
complement :arrow_right:
another acquisition
Ex: Google's foray into cellphone
the acquisition of Android
redeploy Android's employees to work for Google
Google formed various alliances to make its own Android version
bought Motorola
divested most of Motorola to focus elsewhere
Real option
A invests in B
increase investment to a higher level
A acquires B
contemporaneous effects
A company assembles a set of corporate transactions
synergies and learning across them
two cases
:one:
A company acquires several targets in the same industry
Combine them and exploit scale and leverage synergies
:two:
By alliances or partnerships
Build the inter-organizational networks
Creating Synergies
two strategies
stretching strategy
(enhancement)
develop new capabilities
Salesforce's acquisition of Tableau
Tableau helps to add complementary capabilities, products, and technologies to Salesforce's portfolio
leveraging strategy
applying the acquirer's capabilities
Amazon's purchase of Whole Foods
Amazon can use its considerable online capabilities to create more value from Whole Foods retail business
take private equity firm for example
the post-merger challenges
inability to actually integrate the two companies and realize the synergies that were presumed to exist
Operation mode
buy target companies and increase their value by improving how they're managed
maximizing returns for equity investors through large amounts of debt
Value Creation
implement leverage strategies through improved management to increase the value of the target company.
How to create value in mergers and acquisitions?
the combination of the two companies
The synergy based on resources or capabilities
synergies between firm's capabilities seems key to creating value from M&As
purpose
Creating more value than the sum of individual companies.
The Reasons and Challenges of Acquisitions
main reasons
Increased Diversification
acquiring diverse businesses can diversify operations, potentially boosting revenue, lowering risks, and cutting costs.
Reduced Risk
compared to developing new products internally, M&As generally involve lower risks.
Cost Reduction
acquiring can be cheaper than internal development, reducing overall costs.
Increased Speed to Market
M&As can accelerate the speed at which products reach the market, thus generating revenue sooner.
Overcoming Entry Barriers
M&As help overcome barriers to entering new markets.
Increased Market Power
M&As can expand market share and increase revenue.
Avoiding Excessive Competitio
acquiring competitors can reduce market competition and lower operational costs.
challenges
Increased Debt Ratio
After an acquisition, the company's debt ratio may increase, affecting future financial flexibility.
Unrealized Synergies
Expected synergies may not materialize, potentially leading to increased rather than reduced costs.
Overpaying
Insufficient target evaluation can lead to overpayment, compromising acquisition benefits.
Excessive Diversification
Rapid expansion of business operations can impact the overall profitability of the company.
Loss of Executives and Key Staff
Post-acquisition, key staff may depart due to status changes, causing a talent drain.
Management Distraction
Excessive focus on acquisitions can neglect day-to-day operations, impacting performance.
Cultural Integration Issues
Differences in corporate cultures between companies can make integration difficult.
Increased Bureaucratic Costs
As the organization grows, bureaucratic costs may increase.
Divestitures
definition
a transaction that essentially breaks up a large corporation and leads to the separation of a business unit from a company
:red_cross: not selling a set of business
:red_cross: not closing a business
:red_cross: not reselling or reusing its assets
maintained more or less and simply its ownership has changed
modes
spin-off
the business unit is separated completely from the parent company
shares are distributed to the parents shareholders
two companies have the same shareholders (no new share exists)
feature
ITT
the parent ITT created two separate companies
Exelis
Xylem
distributed their shares to shareholders
Create most value
used for the largest units
split off
the parents and shareholders are given the option to exchange their shares for that of the unit.
two options for shareholders of parent company
continue own shares of the parent company
own shares of the new company
give up part of the parent company's shares
carve-out
the parent company sells part of subsidiary ownership in a unit for cash
the parent company sells some of its shares in its subsidiary to the public through an IPO
the parents company stll have at least 50% ownership to have effect control
feature
ITT
sold 40% of the shares in Xylem through an IPO
pocket the cash
have cash proceeds to the parent firm
slowest to execute because of the process of IPO
do not result in the parent company transferring the entire ownership of the unit
unit sale
the business unit is simply sold to another firm, usually for a cash compensation.
feature
ITT
sell Exelis to another firm such as the defense industry
the fastest to execute
used for smaller units
the most common divestiture mode
have cash proceeds to the parent firm
feature
take the choice of ITT for example
reasons
raise cash for parent
firms gets cash only from
unit sale
in the stock market
financially distressed firms use unit sale
give 100 percent cash for the unit which is being divested
carve-out
get rid of low profitability of the unit
focus more attention in other corporate resource
How to manage
Constantly evaluate potential units for divestment
Clear about the goals of any divestiture
Pay attention to the post divestiture governance of the domestic unit.
starbucks and spotify
example
make win win stuetation for both of them
both of them are famous brands in their area
differences terms may cause different negotiations
both of them face same problems
royalites
those thing may cause partnerships extra cost
example
HON HAI and sharp
HON HAI spend 6 billion and 4 thousands million dollars to purchase sharp
for HON HAI they want the technique from sharp
they can not offer the debt
free up &redeploy resources / capabilities
Saling Non-core business units make more positive stock market reaction than core business.
The returns from unit sales
Depend on
The selling company's synergies with the unit
The buying company's synergies with the unit
legos and shell
example
at first
the cooperation was base on promating both brands
the reason of the fail
shell has been regarded as not environmentally friendly enterprise
legos has also been accused should not to cooperated with none eco-friendly company
reduce risk or liability
IF
The unit has significant
exposure to lawsuits or damages
But
May be not proper if do this clearly in blatant
lack of strategic fit
Between companies or the businesses
Units may be divested
refocus on core business
If synergies are low
A number of
non-core business units are divested
free up entrepreneurial / innovative potential
Add units in a new area of business
Divest other units free up managerial resources
Create the room and resources to the new units
Berkshire Hathaway
= an auction
through organizational capabilities
example
example