Topic 11 - Alliances, Mergers and acquisitions

BN 926 Strategy and Management of Change Mergers, Acquisitions, Strategic Alliances and the Boundaries of the Firm Professor Julian Lowe

Aims
To highlight corporate considerations in strategy
To examine diversification as a strategy
To understand the nature of the firm and its limitations
To assess where mergers, or acquisitions or alliances are most appropriate
To assess the impact and importance of scale, scope and transaction costs on the size, scope and nature of the firm

Questions
What determines the scale and scope of your organisation? How does it differ from its competitors?
What is diversification and why diversify?
Why do mergers fail?
Why has there been a boom in alliances? What are the dangers?
Are alliances and partnerships different in Asia/Europe/N. America?

Wesfarmers
Why did Wesfarmers diversify?
What sort of diversification strategy did it follow?
How does it manage diversification?

Diversification
Define corporate strategy and its importance to the diversified firm
Explain why firms move from a single business strategy to a multi business strategy?
How do diversified firms create value?
Related/unrelated?
What incentives and resources help manage diversified businesses
Why do diversified businesses go wrong?

Australian Diversified Industrials 11.5 3,488 Hancock & Gore 15 3.8 3,958 Coventry Group 14 11.8 6,889 Steamships Trading 13 5.7 6,959 McPherson’s 12 8.0 8,962 Hills Industries 11 5.7 17,867 Pacifica Group 10 10.7 21,618 GWA International 9 3.6 24,028 Email 8 9.0 30,756 Austrim Nylex 7 1.9 30,888 Futuris Corporation 6 5 4 3 2 1 5.0 40,005 Smorgan Steel 3.3 60,700 Pacific Dunlop 6.2 61,955 Howard Smith 9.7 91,548 SouthCorp 8.3 100,079 Wesfarmers Return on Revenue (%) Net Profit ($000) Company Name

Levels of diversification
Single business – 95% of revenue comes from a single business
Dominant – 70 – 95% from a single business
Related - < 70% from a single business but these have strong links
Unrelated - < 70% and no strong links
Examples in each category?

Motives, Incentives and Resources for Diversification
That enhance strategic competitiveness?
Neutral to strategic competitiveness?
Managerial motives?

Motives, Incentives and resources for Diversification
Motives to enhance strategic competitiveness
Economies of scope (related diversification) Sharing activities Transferring core competencies
Market power (related diversification) Blocking competitors through multi-point competition Vertical integration
Financial economies (unrelated diversification) Efficient internal capital allocation Business restructuring
Incentives and resources with neutral effects on strategic competitiveness
Antitrust regulation
Tax laws
Low performance
Uncertain future cash flows
Risk reduction for firm
Tangible resources
Intangible resources
Managerial motives (value reduction)
Diversifying managerial employment risk
Increasing managerial compensation

Related Diversification
Operational relatedness?
Corporate relatedness?
Market power?

Unrelated diversification
Financial economies
Efficient internal capital market allocation
Restructuring and sell - off

Value-creating strategies of diversification: Operational and corporate relatedness
Value
High Low Low High Corporate relatedness: Transferring skills into businesses through corporate headquarters Source: Hanson, Dowling, Hitt, Ireland & Hoskisson p203 Sharing: Operational relatedness between businesses Related linked diversification (economies of scope) Unrelated diversification (financial economies) Both operational and corporate relatedness (rare capability and can create diseconomies of scope) Related constrained diversification Vertical integration (market power)

Incentives for diversification
Low performance
Uncertain future cash flows
Firm risk reduction

Resources required for diversification
Tangible
Intangible

Mergers and Acquisitions (M&A)
Current scope of mergers?
Why are M&A popular?
Why M&A and not internal growth?
Conflict between M&A and competitive strategy?
Attributes of M&A that influence competitive success?
The nature of restructuring?

Extent?
1999 – US$3.4 trillion world – wide
Why? – internet, cross border/wto, fad
Result- 1999 KPMG report – 83% failed to increase shareholder wealth in acquiring firms. 53% significantly reduced shareholder wealth.

KPMG 2005 survey
The biennial survey, which was undertaken in conjunction with an independent research company, is the third in the series and looks at major global deals completed during 2000/20001. The survey shows that a higher proportion of deals now enhance value for the acquirer’s shareholders. At 34 percent the figure is double that in our 1999 survey, and for the first time it exceeds the proportion reducing value. Indeed, if the measure is restricted to post-acquisition performance only, then 52 percent of deals can be said to enhance value, up from 36 percent in 2001.

Reasons for acquisitions and problems in achieving success Source: Hanson, Dowling, Hitt, Ireland & Hoskisson p243
Reasons for acquisitions Problems in achieving success
Overcome entry barriers Cost of new product development Increased speed to market Lower risk compared to developing new products Increased diversification Avoid excess competition Increased market power Integration difficulties Inadequate evaluation of target Large or extraordinary debt Inability to achieve synergy Too much diversification Managers overly focused on acquisitions Too large Acquisitions

Attributes of successful acquisitions Source: Hanson, Dowling, Hitt, Ireland & Hoskisson p251 7 6 5 4 3 2 1 Maintain long-term competitive advantage in markets Sustained and consistent emphasis on R & D and innovation Faster and more effective integration Has experience with change and is flexible and adaptable Lower financing cost, lower risk (eg of bankruptcy) and avoidance of trade-offs associated with high debt) Merged firm maintains low to moderate debt position Financing (debt or equity) is easier and less costly to obtain Acquiring firm has financial slack (cash or a favourable debt position) Firms with strongest complementarities and acquired and overpayment is avoided Acquiring firm selects target firms and conducts negotiations carefully and deliberately Faster and more effective integration; possibly lower premiums Acquisition is friendly High probability of synergy and competitive advantage by maintaining strengths Acquired firm has assets or resources that are complementary to the acquiring firm’s core business Results Attributes

Alternatives Short-term outcomes Long-term outcomes Source: Hanson, Dowling, Hitt, Ireland & Hoskisson p258 Restructuring and outcomes Downsizing Downscoping Leveraged buyout Reduced labour costs Reduced debt costs High debt costs Emphasis on strategic controls Loss of human capital Lower performance Higher risk Higher performance

Some Diagnostics IPR and complementary assets strategic impact/relative competences control v. risk

Boundaries of the firm
Examine why we have firms
How they can be improved
The value of strategic alliances

Quote – Day, J., & Wendler, J.C. (1998) ‘The New Economics of Organisation’ McKinsey Quarterly No. 1. Pp 5 – 18.
In their present forms, markets motivate and hierarchies coordinate
Have we learned to combine the best of both
Two challenges for the corporation of the future: Entrepreneurialism and knowledge

Problems With Modern Corporation
Central control
Costly consensus building
Lack of entrepreneurship/motivation
Extensive path dependencies
Can disaggregation help?
Internal – but corrupted and planning interventions
External – loss of control and potential synergy

Alliance v. Acquisition Alliance v. Acquisitions Infeasibility Indigestibility Investment in options Information asymmetry

Relational Forms Market Relational forms Hierarchy External disaggregation Internal disaggregation Personal initiative Enforced cooperation and coordination Relational forms – making coordinated moves in a more entrepreneurial environment

Strategic Alliances: Definitions and Distinctions
Collaboration
Networks
Partnerships
Alliances
Joint Ventures
Consortia
Constellations
…… vertical and/or horizontal
School of Strategic Management, Bristol Business School

Traditional Competition single firms

Collective Competition group triad pair

Theoretical Perspectives
Transaction costs
Scale
Risk
Control
Agency
Synergy
Knowledge transfer

Alliances and Constellations
Alliance
incomplete or open contract between separate firms, involving shared control
Constellation
set of firms linked through alliances
alternative to a single firm as a way to control a set of capabilities needed to compete in a given context

Strategic Alliances: Rationales INCREASING ATTRACTIVENESS OF STRATEGIC ALLIANCES Increasing Development Costs Shorter Product Life-cycles Increasing Cost Pressures Globalisation Building new businesses or introducing new products Improving economics of existing business New generation of product technology Speed NPD Develop upstream technology Achieve market penetration Fill product line gaps Exploit economies of scale Increase capacity utilisation

Small Firm : Large Firm Issues
Large Firms
Growth and sales
Partners R & D
Additional resources
Preempt comp’n
Small Firms
Exploit technology
Access foreign markets
Access reputation and expertise
Access finance
Share risk

Some Diagnostics IPR and complementary assets strategic impact/relative competences control v. risk

Strategic Alliances: Pitfalls
Transaction costs
Diffusion of Strategic Assets
Appropriation of Competitive Advantage
Effect on Competitiveness and Innovation

Strategic Alliances: Reasons for Failure
Not enough attention paid to detail
Different strategic goals
Lack of top executive commitment
Mutual trust failed to develop
Organisational culture differences
Change in partner objectives

Strategic Alliances: The Problem of Fit School of Strategic Management, Bristol Business School strategic fit cultural fit - + + - Collaborative Advantage if Cultural Adjustment Optimal Collaborative Advantage No Compatibility or Collaborative Advantage Compatible but no Collaborative Advantage School of Strategic Management, Bristol Business School

Strategic Alliances: The Network Organisation DISTRIBUTORS STABLE NETWORK SUPPLIERS CORE FIRM School of Strategic Management, Bristol Business School DESIGN MARKETING & DISTRIBUTION BROKER PRODUCTION SUPPLY DESIGN MARKETING & DISTRIBUTION BROKER PRODUCTION SUPPLY

Strategic Alliances: New Managerial Roles
Move to boundary spanning roles
More emphasis on (less) human resources
New control strategies
Acceptance of organisation as an open network system
Politics and conflicts
Organising learning processes
Incongruence and divergence between authority and responsibility
Changing labour relations

Strategic Alliances: Design and Management Issues
Goal congruence and strategic compatibility
Trust and mutual interaction
Structural and cultural compatibility
Communication and systems compatibility
Interaction and transaction costs
Flexibility within strategic control

Strategic Alliances: The View From a Guru
Individual excellence
Importance
Interdependence
Investment
Information
Integration
Institutionalisation
Integrity
strategic tactical operational interpersonal cultural

Strategic Issues Pre and Post Alliance
Capture value : Ownership of assets that are scarce and complementary
brand
supply chain
technology
Control of ‘stickiness’
facilitate transfer and absorption but guard against loss of critical knowledge
Maintain large surface area of contact
disaggregation provide more access points for knowledge management
Control costs of coordination
disaggregation can go too far

The Future
No one way
Innovative forms of joint ownership
Further growth through growth of connectivity
Trust v. Contract v. Guanxi
Focus on the strategic

Questions
How do transaction costs influence the scale and scope of an enterprise?
Does the failure of many mergers mean we will see fewer of them?
What impact on scale and scope of the firm and alliances will we see from capital markets, technology change, and globalisation?

Topic 11 - Alliances, Mergers and acquisitions

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