Topic 11 - Alliances, Mergers and acquisitions


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Topic 11 - Alliances, Mergers and acquisitions

  1. 1. BN 926 Strategy and Management of Change Mergers, Acquisitions, Strategic Alliances and the Boundaries of the Firm Professor Julian Lowe
  2. 2. Aims <ul><li>To highlight corporate considerations in strategy </li></ul><ul><li>To examine diversification as a strategy </li></ul><ul><li>To understand the nature of the firm and its limitations </li></ul><ul><li>To assess where mergers, or acquisitions or alliances are most appropriate </li></ul><ul><li>To assess the impact and importance of scale, scope and transaction costs on the size, scope and nature of the firm </li></ul>
  3. 3. Questions <ul><li>What determines the scale and scope of your organisation? How does it differ from its competitors? </li></ul><ul><li>What is diversification and why diversify? </li></ul><ul><li>Why do mergers fail? </li></ul><ul><li>Why has there been a boom in alliances? What are the dangers? </li></ul><ul><li>Are alliances and partnerships different in Asia/Europe/N. America? </li></ul>
  4. 4. Wesfarmers <ul><li>Why did Wesfarmers diversify? </li></ul><ul><li>What sort of diversification strategy did it follow? </li></ul><ul><li>How does it manage diversification? </li></ul>
  5. 5. Diversification <ul><li>Define corporate strategy and its importance to the diversified firm </li></ul><ul><li>Explain why firms move from a single business strategy to a multi business strategy? </li></ul><ul><li>How do diversified firms create value? </li></ul><ul><ul><li>Related/unrelated? </li></ul></ul><ul><li>What incentives and resources help manage diversified businesses </li></ul><ul><li>Why do diversified businesses go wrong? </li></ul>
  6. 6. 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
  7. 7. Levels of diversification <ul><li>Single business – 95% of revenue comes from a single business </li></ul><ul><li>Dominant – 70 – 95% from a single business </li></ul><ul><li>Related - < 70% from a single business but these have strong links </li></ul><ul><li>Unrelated - < 70% and no strong links </li></ul><ul><li>Examples in each category? </li></ul>
  8. 8. Motives, Incentives and Resources for Diversification <ul><li>That enhance strategic competitiveness? </li></ul><ul><li>Neutral to strategic competitiveness? </li></ul><ul><li>Managerial motives? </li></ul>
  9. 9. Motives, Incentives and resources for Diversification <ul><li>Motives to enhance strategic competitiveness </li></ul><ul><li>Economies of scope (related diversification) Sharing activities Transferring core competencies </li></ul><ul><li>Market power (related diversification) Blocking competitors through multi-point competition Vertical integration </li></ul><ul><li>Financial economies (unrelated diversification) Efficient internal capital allocation Business restructuring </li></ul><ul><li>Incentives and resources with neutral effects on strategic competitiveness </li></ul><ul><li>Antitrust regulation </li></ul><ul><li>Tax laws </li></ul><ul><li>Low performance </li></ul><ul><li>Uncertain future cash flows </li></ul><ul><li>Risk reduction for firm </li></ul><ul><li>Tangible resources </li></ul><ul><li>Intangible resources </li></ul><ul><li>Managerial motives (value reduction) </li></ul><ul><li>Diversifying managerial employment risk </li></ul><ul><li>Increasing managerial compensation </li></ul>
  10. 10. Related Diversification <ul><li>Operational relatedness? </li></ul><ul><li>Corporate relatedness? </li></ul><ul><li>Market power? </li></ul>
  11. 11. Unrelated diversification <ul><li>Financial economies </li></ul><ul><ul><li>Efficient internal capital market allocation </li></ul></ul><ul><ul><li>Restructuring and sell - off </li></ul></ul>
  12. 12. Value-creating strategies of diversification: Operational and corporate relatedness <ul><li>Value </li></ul>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)
  13. 13. Incentives for diversification <ul><li>Low performance </li></ul><ul><li>Uncertain future cash flows </li></ul><ul><li>Firm risk reduction </li></ul>
  14. 14. Resources required for diversification <ul><li>Tangible </li></ul><ul><li>Intangible </li></ul>
  15. 15. Mergers and Acquisitions (M&A) <ul><li>Current scope of mergers? </li></ul><ul><li>Why are M&A popular? </li></ul><ul><li>Why M&A and not internal growth? </li></ul><ul><li>Conflict between M&A and competitive strategy? </li></ul><ul><li>Attributes of M&A that influence competitive success? </li></ul><ul><li>The nature of restructuring? </li></ul>
  16. 16. Extent? <ul><li>1999 – US$3.4 trillion world – wide </li></ul><ul><li>Why? – internet, cross border/wto, fad </li></ul><ul><li>Result- 1999 KPMG report – 83% failed to increase shareholder wealth in acquiring firms. 53% significantly reduced shareholder wealth. </li></ul>
  17. 17. KPMG 2005 survey <ul><li>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. </li></ul>
  18. 18. Reasons for acquisitions and problems in achieving success Source: Hanson, Dowling, Hitt, Ireland & Hoskisson p243 <ul><li>Reasons for acquisitions Problems in achieving success </li></ul>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
  19. 19. 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
  20. 20. 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
  21. 21. Some Diagnostics IPR and complementary assets strategic impact/relative competences control v. risk
  22. 22. Boundaries of the firm <ul><li>Examine why we have firms </li></ul><ul><li>How they can be improved </li></ul><ul><li>The value of strategic alliances </li></ul>
  23. 23. Quote – Day, J., & Wendler, J.C. (1998) ‘The New Economics of Organisation’ McKinsey Quarterly No. 1. Pp 5 – 18. <ul><li>In their present forms, markets motivate and hierarchies coordinate </li></ul><ul><li>Have we learned to combine the best of both </li></ul><ul><li>Two challenges for the corporation of the future: Entrepreneurialism and knowledge </li></ul>
  24. 24. Problems With Modern Corporation <ul><li>Central control </li></ul><ul><li>Costly consensus building </li></ul><ul><li>Lack of entrepreneurship/motivation </li></ul><ul><li>Extensive path dependencies </li></ul><ul><li>Can disaggregation help? </li></ul><ul><li>Internal – but corrupted and planning interventions </li></ul><ul><li>External – loss of control and potential synergy </li></ul>
  25. 25. Alliance v. Acquisition Alliance v. Acquisitions Infeasibility Indigestibility Investment in options Information asymmetry
  26. 26. 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
  27. 27. Strategic Alliances: Definitions and Distinctions <ul><li>Collaboration </li></ul><ul><li>Networks </li></ul><ul><li>Partnerships </li></ul><ul><li>Alliances </li></ul><ul><li>Joint Ventures </li></ul><ul><li>Consortia </li></ul><ul><li>Constellations </li></ul><ul><ul><li>…… vertical and/or horizontal </li></ul></ul>School of Strategic Management, Bristol Business School
  28. 28. Traditional Competition single firms
  29. 29. Collective Competition group triad pair
  30. 30. Theoretical Perspectives <ul><li>Transaction costs </li></ul><ul><li>Scale </li></ul><ul><li>Risk </li></ul><ul><li>Control </li></ul><ul><li>Agency </li></ul><ul><li>Synergy </li></ul><ul><li>Knowledge transfer </li></ul>
  31. 31. Alliances and Constellations <ul><li>Alliance </li></ul><ul><ul><li>incomplete or open contract between separate firms, involving shared control </li></ul></ul><ul><li>Constellation </li></ul><ul><ul><li>set of firms linked through alliances </li></ul></ul><ul><ul><li>alternative to a single firm as a way to control a set of capabilities needed to compete in a given context </li></ul></ul>
  32. 32. 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
  33. 33. Small Firm : Large Firm Issues <ul><li>Large Firms </li></ul><ul><ul><li>Growth and sales </li></ul></ul><ul><ul><li>Partners R & D </li></ul></ul><ul><ul><li>Additional resources </li></ul></ul><ul><ul><li>Preempt comp’n </li></ul></ul><ul><li>Small Firms </li></ul><ul><ul><li>Exploit technology </li></ul></ul><ul><ul><li>Access foreign markets </li></ul></ul><ul><ul><li>Access reputation and expertise </li></ul></ul><ul><ul><li>Access finance </li></ul></ul><ul><ul><li>Share risk </li></ul></ul>
  34. 34. Some Diagnostics IPR and complementary assets strategic impact/relative competences control v. risk
  35. 35. Strategic Alliances: Pitfalls <ul><li>Transaction costs </li></ul><ul><li>Diffusion of Strategic Assets </li></ul><ul><li>Appropriation of Competitive Advantage </li></ul><ul><li>Effect on Competitiveness and Innovation </li></ul>School of Strategic Management, Bristol Business School
  36. 36. Strategic Alliances: Reasons for Failure <ul><li>Not enough attention paid to detail </li></ul><ul><li>Different strategic goals </li></ul><ul><li>Lack of top executive commitment </li></ul><ul><li>Mutual trust failed to develop </li></ul><ul><li>Organisational culture differences </li></ul><ul><li>Change in partner objectives </li></ul>School of Strategic Management, Bristol Business School
  37. 37. 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
  39. 39. Strategic Alliances: New Managerial Roles <ul><li>Move to boundary spanning roles </li></ul><ul><li>More emphasis on (less) human resources </li></ul><ul><li>New control strategies </li></ul><ul><li>Acceptance of organisation as an open network system </li></ul><ul><li>Politics and conflicts </li></ul><ul><li>Organising learning processes </li></ul><ul><li>Incongruence and divergence between authority and responsibility </li></ul><ul><li>Changing labour relations </li></ul>School of Strategic Management, Bristol Business School
  40. 40. Strategic Alliances: Design and Management Issues <ul><li>Goal congruence and strategic compatibility </li></ul><ul><li>Trust and mutual interaction </li></ul><ul><li>Structural and cultural compatibility </li></ul><ul><li>Communication and systems compatibility </li></ul><ul><li>Interaction and transaction costs </li></ul><ul><li>Flexibility within strategic control </li></ul>School of Strategic Management, Bristol Business School
  41. 41. Strategic Alliances: The View From a Guru <ul><li>Individual excellence </li></ul><ul><li>Importance </li></ul><ul><li>Interdependence </li></ul><ul><li>Investment </li></ul><ul><li>Information </li></ul><ul><li>Integration </li></ul><ul><li>Institutionalisation </li></ul><ul><li>Integrity </li></ul>strategic tactical operational interpersonal cultural
  42. 42. Strategic Issues Pre and Post Alliance <ul><li>Capture value : Ownership of assets that are scarce and complementary </li></ul><ul><ul><li>brand </li></ul></ul><ul><ul><li>supply chain </li></ul></ul><ul><ul><li>technology </li></ul></ul><ul><li>Control of ‘stickiness’ </li></ul><ul><ul><li>facilitate transfer and absorption but guard against loss of critical knowledge </li></ul></ul><ul><li>Maintain large surface area of contact </li></ul><ul><ul><li>disaggregation provide more access points for knowledge management </li></ul></ul><ul><li>Control costs of coordination </li></ul><ul><ul><li>disaggregation can go too far </li></ul></ul>
  43. 43. The Future <ul><li>No one way </li></ul><ul><li>Innovative forms of joint ownership </li></ul><ul><li>Further growth through growth of connectivity </li></ul><ul><li>Trust v. Contract v. Guanxi </li></ul><ul><li>Focus on the strategic </li></ul>
  44. 44. Questions <ul><li>How do transaction costs influence the scale and scope of an enterprise? </li></ul><ul><li>Does the failure of many mergers mean we will see fewer of them? </li></ul><ul><li>What impact on scale and scope of the firm and alliances will we see from capital markets, technology change, and globalisation? </li></ul>
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