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Chapter 10
Studying Mergers and Acquisitions

Zürich, Dec. 1th 2010

Prof. Rolf Jufer
(rolf.jufer@bfh.ch)
MERGERS AND ACQUISITIONS




MSE - Business Strategy   Dec. 1th 2010   Prof. Rolf Jufer   1
OBJECTIVES




                                  1 Explain the motivations behind acquisitions and
                       ...
THE eBAY-PAYPAL ACQUISITION




MSE - Business Strategy   Dec. 1th 2010   Prof. Rolf Jufer   3
THE eBAY-PAYPAL ACQUISITION




MSE - Business Strategy   Dec. 1th 2010   Prof. Rolf Jufer   4
THE eBAY-PAYPAL ACQUISITION




           The partnership made sense …       … but would it work?

            Rely on t...
THE eBAY-PAYPAL BUSINESS MODELS


      eBay business model                                 PayPal business model

       ...
OTHER EXAMPLES: ORACLE BUYS SUN




   •    On April 20, 2009, Sun and Oracle Corporation announced that they
        ente...
OTHER EXAMPLES: ACQUISITION OF SWISS AIR




MSE - Business Strategy          Dec. 1th 2010   Prof. Rolf Jufer    8
OTHER EXAMPLES: NOVARTIS MERGER




MSE - Business Strategy      Dec. 1th 2010   Prof. Rolf Jufer   9
MERGER VS. ACQUISITION


                           A               B                      C
                             ...
WHAT‘S ABOUT THE ORANGE / SUNRISE DEAL?

                                                          France Telecom and Denm...
MOTIVES FOR MERGERS AND ACQUISITIONS


Managerial self-interest             Hubris                              Synergy
So...
M&A – A VEHICLE THAT IMPACTS ALL ELEMENTS OF THE STRATEGY DIAMOND


  M&A and the Strategy Diamond
  While mergers and acq...
TOP DEALS 2008 BY VALUE IN SWITZERLAND




                                                Source: http://www.kpmg.ch/docs...
UPs AND DOWNs AT SNAPPLE



In 1972, brothers-in-                                                   Cadbury Schweppes buys...
BENEFITS AND DRAWBACK OF ACQUISITIONS OVER INTERNAL DEVELOPMENT



                                           • Move expen...
CLASSIFICATION OF ACQUISITIONS

                                                                        Product/
         ...
THE SYNERGY TRAP



     Acquisition premiums                                    Create two problems for managers


      ...
HOW WOULD YOU DO THAT? – PAYPAL ACQUISITION




                           Years until               Cost of capital
     ...
THE ACQUISITION PROCESS


                                               A process perspective


                         ...
ACQUISITION SCREENING


     “Soft-fit” acquisition screening by Cisco systems

       Screening criteria                M...
ABSORPTION

                                 Need for strategic interdependence

                                         ...
PRESERVATION

                                 Need for strategic interdependence

                                       ...
HOLDING

                                 Need for strategic interdependence

                                           L...
SYMBIOSIS

                                 Need for strategic interdependence

                                          ...
TIPS FROM PERRY AND HERD




                          1 Firms must study failed M&As as
                            much ...
M&As AND INDUSTRY LIFE CYCLE




              Introduction                    Growth                      Maturity


    ...
M&As IN DYNAMIC CONTEXTS

  Technological           Cisco and Microsoft both use acquisitions to ensure
     change       ...
REVIEW QUESTIONS



   1. What is an acquisition?
   2. Why would firms use acquisitions rather than create a new business...
GROUP ACTIVITY




            Pick a firm of interest to your group. Identify potential
            acquisition candidate...
GROUP ACTIVITY




            Pick a firm of interest and peruse its annual reports over a
            5- to 10-year peri...
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  1. 1. Chapter 10 Studying Mergers and Acquisitions Zürich, Dec. 1th 2010 Prof. Rolf Jufer (rolf.jufer@bfh.ch)
  2. 2. MERGERS AND ACQUISITIONS MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 1
  3. 3. OBJECTIVES 1 Explain the motivations behind acquisitions and show how they’ve changed over time 2 Explain why mergers and acquisitions are important vehicles of corporate strategy 3 Identify the various types of acquisitions 4 Understand how the pricing of acquisitions affects the realization of synergies 5 Outline the alternative ways to integrate acquisition and explain the implementation process 6 Discuss the characteristics of acquisitions in different industry contexts MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 2
  4. 4. THE eBAY-PAYPAL ACQUISITION MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 3
  5. 5. THE eBAY-PAYPAL ACQUISITION MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 4
  6. 6. THE eBAY-PAYPAL ACQUISITION The partnership made sense … … but would it work?  Rely on transaction-based Can we recoup the $250 million revenue premium we paid with savings and revenue growth?  No inventory or warehousing  No sales force MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 5
  7. 7. THE eBAY-PAYPAL BUSINESS MODELS eBay business model PayPal business model eBay PayPal Contract and Seller payment occur Buyer Payer Payee between buyer and seller PayPal’s revenue comes eBay revenue comes from from float in the personal sellers paying auction accounts and fees for pre- posting fees mier and business accounts MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 6
  8. 8. OTHER EXAMPLES: ORACLE BUYS SUN • On April 20, 2009, Sun and Oracle Corporation announced that they entered into a definitive agreement under which Oracle will acquire Sun for $7.4 billion. Sun shareholders approved the acquisition on July 16, 2009. As of November 2009 the acquisition is pending regulatory approvals. • On November 6, in its 10-Q filing for the 1st quarter of the 2010 fiscal year, Sun announced 25% total revenue decrease, compared to the 1st quarter of the previous year, due to "economic downturn, the uncertainty associated with our proposed acquisition by Oracle, increased competition and delays in customer purchasing decisions". MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 7
  9. 9. OTHER EXAMPLES: ACQUISITION OF SWISS AIR MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 8
  10. 10. OTHER EXAMPLES: NOVARTIS MERGER MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 9
  11. 11. MERGER VS. ACQUISITION A B C The consolidation or combination Merger of one firm with another A B A The purchase of one firm by another Acquisition so that ownership transfers MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 10
  12. 12. WHAT‘S ABOUT THE ORANGE / SUNRISE DEAL? France Telecom and Denmark’s TDC are set to merge their Swiss operations — Orange Switzerland and Sunrise, respectively — in a move that would create a powerful rival to the market leader – Swisscom. France Telecom said it will pay 1.5 billion EUR to TDC to become a 75% shareholder in the combined entity, while TDC will hold the remaining 25%. The new firm will have approximately 3.4 million mobile and 1.1 million fixed and broadband customers, accounting for a 38% share of the Swiss mobile market and 13% of the fixed broadband connections. At the same time, the merger is expected to generate synergies to the tune of 2.1 billion EUR. According to France Telecom’s Gervais Pellissier: “The planned merger of Sunrise and Orange Switzerland marks a new significant step in the long-term investment by France Telecom-Orange in Switzerland. Following the UK joint venture between Orange and T- Mobile (NYSE: DT), France Telecom completes another major in- market consolidation, consistent with its M&A policy.” At the moment, Swisscom dominates the Swiss mobile market with an estimated 62% marketshare (5.5 million connections) in Q3 2009. Sunrise holds the second position with 1.9 million users (a 21% market share), while Orange is third with 1.6 million users (18%). http://www.sunrise.ch/medienmitteilungenatt.htm?mediaattid=6110&filename=PR_Switzerland_Orange_Sunrise_251109_EN.pdf MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 11
  13. 13. MOTIVES FOR MERGERS AND ACQUISITIONS Managerial self-interest Hubris Synergy Sometimes termed Managers may make mis- Managers may believe that “Managerialism”, manager taken valuation and have the value of the firms can conceivably make unwarranted confidence in combined can be greater acquisitions-and even their valuation and in their than the sum of the two willingly overpay for them-to ability to create value independently maximize their own because of pride, over- • Reduced threats interests at the expense of confidence, or arrogance shareholder wealth • Increased market power and access • Realized cost savings • Increased financial strength • Sharing and leveraging capabilities MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 12
  14. 14. M&A – A VEHICLE THAT IMPACTS ALL ELEMENTS OF THE STRATEGY DIAMOND M&A and the Strategy Diamond While mergers and acquisition are explicitly vehicles of strategy, they have major implications for arenas staging, and economic logic as well Arenas Economic Staging Vehicles logic Differentiators Source: Adapted from Hambrick and Fredrickson, “Are You Sure You Have a Strategy?” Academy of Management Executive 15:4 (2001) 48-59 MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 13
  15. 15. TOP DEALS 2008 BY VALUE IN SWITZERLAND Source: http://www.kpmg.ch/docs/KPMG_MA_Yearbook09.pdf MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 15
  16. 16. UPs AND DOWNs AT SNAPPLE In 1972, brothers-in- Cadbury Schweppes buys Snapple from Triarc law Leonard Marsh for $1.45 billion. Snapple is now part of the and Hyman Golden very successful America’s Beverage division, and Arnold Greenberg, After sizzling success, which includes 7up, Dr. Pepper, Mystic, and Marsh’s childhood Snapple is sold to Quaker Mott’s juices, among other brands. Has friend, founded a for $1.8 billion Snapple found its home? business called the Unadulterated Food Corporation and began selling juice in Queens. The name Snapple 1` was coined while trying 1972 1994 1997 2000 to develop an apple soda. In 1987, Snapple introduced iced teas with fun names and flavors and enlisted (2) controversial radio Fewer than three years later, Quaker personalities, Howard throws in the towel and sells Snapple Stern and Rush for $300 million to Triarc Limbaugh, to promote them MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 16
  17. 17. BENEFITS AND DRAWBACK OF ACQUISITIONS OVER INTERNAL DEVELOPMENT • Move expensive • Inherit adjunct businesses • Cannot spread commitment over several years (one-time, all-or-nothing decision) • Potential for organizational conflict • Speed • Critical Mass • Access to complementary assets • Reduced competition MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 18
  18. 18. CLASSIFICATION OF ACQUISITIONS Product/ Overcapacity Market Industry M&A Roll-up-M&A Extension M&A as R&D Convergence Example DaimlerChrysler Service Pepsi’s Intel’s dozens of AOL’s acquisition merger Corporation acquisition of acquisitions of Time-Warner International more Gatorade small high tech than 100 companies acquisitions of funeral homes Objectives Eliminating Efficiency of Synergy of similar Short cut Anticipation of capacity, gaining larger operations but expanded innovation by new industry market share, and (e.g., economies product lines of buying it from emerging; culling increasing of scale, superior geographic small companies resources from efficiency management) markets firms in multiple industries whose boundaries are eroding Percent of all M&A deals 37% 9% 36% 1% 4% Source: J.L. Bower, “ Not All M&As Are Alike – and That Matters,” Harvard Business Review 79:3 (2001), 92-101 MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 19
  19. 19. THE SYNERGY TRAP Acquisition premiums Create two problems for managers Premiums increase The longer it takes the level of returns to implement the combined performance businesses must improvements, the extract more likely the acquisition will fail MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 20
  20. 20. HOW WOULD YOU DO THAT? – PAYPAL ACQUISITION Years until Cost of capital synergies are implemented 10% 15% 20% • “How much eBay paid 0 0.100 0.150 0.200 incremental net a $250 million income must you premium for 1 0.110 0.173 0.240 generate if you PayPal, now implement synergies they must earn 2 0.121 0.198 0.288 in two years? that premium back 3 0.133 0.228 0.346 • What if they take five years to implement? 4 0.146 0.262 0.415 5 0.161 0.302 0.498 MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 21
  21. 21. THE ACQUISITION PROCESS A process perspective Results Acquisition integration Justification due diligence, negotiation Idea Decision-making Integration process problems process problems Source: Adapted from P.C. Haspeslagh and D.B. Jemison, Managing Acquisitions: Creating Value Through Corporate Renewal (New York Free Press, 1991), 42 MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 22
  22. 22. ACQUISITION SCREENING “Soft-fit” acquisition screening by Cisco systems Screening criteria Means of achieving criteria Offer both short- and • Have complementary technology that fills a need in long-term win-wins for Cisco’s core product space Cisco acquired company • Have a technology that can be delivered through Cisco’s existing distribution channels • Have a technology and products that can be supported by Cisco's support organization • Is able to leverage Cisco’s existing infrastructure and resource base to increase its overall value Share a common vision • Have a similar understanding and vision of the market and chemistry with Cisco • Have a similar culture • Have a similar risk-taking style Be located (preferably) in • Have a company headquarters and most manufacturing Silicon Valley or near one facilities close to one of Cisco's main sites of Cisco’s remote sites MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 23
  23. 23. ABSORPTION Need for strategic interdependence Low High High Preservation Symbiosis Need for organizational autonomy Low Holding Absorption Acquiring company completely absorbs the target company. If the target company is large, this can take time (e.g., Franklin Quest’s acquisition of the Covey Leadership Center to create Franklin Covey) MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 24
  24. 24. PRESERVATION Need for strategic interdependence Low High High Preservation Symbiosis Need for organizational autonomy Low Holding Absorption The acquiring company makes very few changes to the target , and instead learned from it in preparation for future growth (e.g., many of Wal-Mart’s early international acquisitions) MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 25
  25. 25. HOLDING Need for strategic interdependence Low High High Preservation Symbiosis Need for organizational autonomy Low Holding Absorption The acquiring company allows little autonomy - yet does not integrate the target into its businesses (e.g., Bank One’s acquisitions of local banks ) MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 26
  26. 26. SYMBIOSIS Need for strategic interdependence Low High High Preservation Symbiosis Need for organizational autonomy Low Holding Absorption The acquiring company integrates the target in order to achieve synergies - but allows for autonomy, for example to retain and motivate employees. This is possibly the most difficult to implement (e.g., Cisco's acquisitions which cost the firm $1 million per employee on average) MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 27
  27. 27. TIPS FROM PERRY AND HERD 1 Firms must study failed M&As as much as successes. 2 Traditional due diligence is no longer sufficient. With M&A deals increasingly risky, there is more need for pre-deal planning. MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 29
  28. 28. M&As AND INDUSTRY LIFE CYCLE Introduction Growth Maturity M&As tend to be M&As tend to be for M&As primarily for R&D and product- acquiring products dealing with over related that are proven and capacity in the gaining acceptance industry MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 31
  29. 29. M&As IN DYNAMIC CONTEXTS Technological Cisco and Microsoft both use acquisitions to ensure change they maintain their strong competitive positions When the Tribune Company merged with Times-Mirror in 2000, Demographic it acquired Spanish-language “Hoy” to target the growing U.S change Hispanic market Geopolitical IBM divested its PC division to a Chinese company as that change country emerges Trade liberalization Wal-Mart acquired Mexican retail giant, Cifra, in wake of NAFTA AT&T divested local operations into “Baby Bells” and set off a Deregulation state of almost constant M&A MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 32
  30. 30. REVIEW QUESTIONS 1. What is an acquisition? 2. Why would firms use acquisitions rather than create a new business internally? 3. What are the possible motives for acquisitions? 4. What are the ways in which synergies can be created in acquisitions? ? 5. How easy or difficult is it to achieve the alternative types of synergies? 6. What are the various types of acquisitions? 7. How do market-extension acquisitions and geographic rollups differ? 8. Give examples of product extension, overcapacity, and R&D acquisitions? 9. What is an acquisition premium? 10.How can you calculate the synergies that must be extracted from an acquisition with a given premium? 11.How do acquisitions tend to be used in different stages of the industry life cycle? 33
  31. 31. GROUP ACTIVITY Pick a firm of interest to your group. Identify potential acquisition candidates. Explain why these companies would make sense as an acquisition target. Evaluate and describe possible implementation barriers to this acquisition. 34
  32. 32. GROUP ACTIVITY Pick a firm of interest and peruse its annual reports over a 5- to 10-year period. Assess the information presented on M&As in the annual reports. Do you see any explicit mention of the link between strategy formulation and implementation with respect to the acquisition mentioned in the annual reports? (As a starting place, see the chairman’s letter to the shareholders.) What are the before-and-after scenarios that you find regarding the M&As? 35
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