Growth Strategies: Non-Organic Growth


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This is the 7th part of the undergraduate course in Growth Strategies: Extensive Growth (M&A). Read by Pavel Luksha

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  • Нидан: «Моя семья», «Чемпион»; PepsiCo: Tropicana «Европейская медиагруппа» и «Профмедиа»: "Авторадио" и "Юмор FM« (ВКПМ), "Русское радио", "Хит FM", "Максимум", DFM (РМГ) Русская вино-водочная компания" (РВВК дистрибуторские мощности с ОСТ (водки "Богородская", "Шустов"). ОСТ разливает для РВВК "Флагман". Продвижение коньяка «Бастион»
  • Growth Strategies: Non-Organic Growth

    1. 1. GROWTH STRATEGIES Extensive Growth: Alliances and M&A Pavel Olegovich Luksha [email_address]
    2. 2. Opportunities sought: Tata Group <ul><li>Tata Steel (steel manufacturing), Tata Motors (top Indian car manufacturer), Tata Consultancy Company (top Asian IT company), Tata Power (top Indian private energy company), Tata Tea (2 nd largest global tea producer), Titan (leading global watch producer), Indian Hotels Company (leading Indian hospitality operator , owner of Taj), etc </li></ul><ul><li>Usual routine: JV with a top global player to launch operations (e.g. Tata Tea with Tetley, Tata Motors with Daimler-Benz etc.), and further expansion through acquisitions </li></ul>
    3. 3. Extensive growth <ul><li>Natural limitations of organic growth ( organization-specific competencies and image in the market ) </li></ul><ul><li>Overcoming limitations by means of extensive growth : partnerships ( alliances ) and M&A </li></ul>
    4. 4. Competitor alliances <ul><li>PSA Peugeot Citroën and Toyota с launched a new European city car: Citroen C1 = Peugeot 107 = Toyota Aygo </li></ul><ul><li>Microsoft и Novell: partnered in order to integrate Microsoft products into Linux operating system </li></ul>Co-ompetion is a situation when partnership between competitors is mutually beneficial, and thus they collaborate Citroen C1 model
    5. 5. Some types of co-ompetitive alliances <ul><li>R&D alliances : Pratt&Whitney and MTU , Schering and Novo Nordisk </li></ul><ul><li>Technology transfer between competitors : IBM and Apple, Apple and Microsoft ( common OS platform ) </li></ul><ul><li>Joint cross-distribution of competitors across different countries : Nissan and Volkswagen , Hoffman-LaRoche and Glaxo </li></ul><ul><li>Joint tenders : Boeing and Lockheed </li></ul>
    6. 6. Competitor cooperation for innovation and entrepreneurship <ul><li>Nokia and Siemens: pooling network equipment divisions in JV to develop integrated solutions for fixed-line, broadband Internet, wireless and TV. JV will benefit from economies of scale to compete against Asian rivals </li></ul><ul><li>Hismelt (Rio Tinto’s subsidiary) invented a new way of making iron that may cut production costs by 20%. $750+ Mil spent by Rio Tinto, Nucor Corp. (US), Japanese trading house Mitsubishi and Shougang Steel (China) </li></ul>
    7. 7. Some types of competitor alliances in the Russian market <ul><li>Partnership in sales : Эфко and Bunge (oil&fat market ), Нидан and PepsiCo (juice market ), ‘ Русская медиагруппа ’ and ‘ Профмедиа ’ </li></ul><ul><li>Partnership in production capacity utilization : ОСТ and РВВК ( vodka ), ‘ Савушкин продукт ’ and ‘ Вимм-Билль-Данн ’ (dairy products ), Нидан and PepsiCo </li></ul><ul><li>Partnership in procurement : РусПромАвто and Северсталь-Авто ( cars and automotive components ) </li></ul>
    8. 8. Competitor alliance: opportunities and problems <ul><li>‘ Сибирский берег ’ ( snacks: ‘ Кириешки ’ , ‘BEER ка ’ ): </li></ul><ul><ul><li>alliance with ‘ Крошка-картошка ’ (2004) to enter the fastfood market </li></ul></ul><ul><ul><li>alliance broken after one year : ‘we understood how the business works, no need for further allying’ </li></ul></ul><ul><ul><li>‘ Сибирский берег ’ began to develop its own regional fastfood network ( Nizhny Novgorod , Krasnoyarsk etc .) </li></ul></ul><ul><ul><li>signed a partnership agreement with a world fastfood market leader Carl’s Junior </li></ul></ul>
    9. 9. Complimentary producer alliances <ul><li>Producers of complimentary products / services are natural Co-ompetitors that often turn into Frenemies : </li></ul><ul><ul><li>cooperation : interactive ad seller Google and top global ad agency WPP </li></ul></ul><ul><ul><li>riding a bear : Microsoft and IBM (relationship changed in 1990 s ) </li></ul></ul><ul><ul><li>buying ‘frenemy’ : PayPal and eBay </li></ul></ul>
    10. 10. Frenemy problem <ul><li>Complimentary markets are in win-win position </li></ul><ul><li>Yet they compete for their slice of the pie </li></ul><ul><li>Microsoft and Intel : </li></ul><ul><ul><li>80% PCs have Intel processor , and over 90% have Microsoft software – but Intel is more interested in the partnership </li></ul></ul><ul><ul><li>Microsoft forced Intel to give license for their newly developed MMX processing algorithms for free to its competitor AMD ( increasing no of installations ) </li></ul></ul><ul><ul><li>Intel later sought to reduce its dependency on Microsoft (e.g. by supporting open-source) </li></ul></ul>
    11. 11. Transforming partners across the value chain <ul><li>Lenovo : began to act as IBM’s distributor in 1980s, entered product through localization efforts, bought IBM’s PC division in 2005 </li></ul><ul><li>Wal-Mart / Target: venturing into production to sell products similar to those of their vendors </li></ul><ul><li>Automotive / aircraft OEM suppliers: selling spare parts to airlines (often in ‘gray’ markets) </li></ul>
    12. 12. Benefits of using ‘frenemies’ <ul><li>Benefits of strategic sourcing usually exceed potential losses </li></ul><ul><ul><li>economies of scale: e.g. supplier can produce its products for several competing companies </li></ul></ul><ul><ul><li>focusing on most profitable activities: R&D and sales </li></ul></ul><ul><ul><li>increased coordination opportunities ( Internet etc. ) </li></ul></ul><ul><ul><li>suppliers can be changed faster if modular production and flexible manufacturing systems are implemented </li></ul></ul>
    13. 13. Principles of managing frenemies <ul><li>Outsource smartly </li></ul><ul><li>Tie contracts to circumstances: e.g. significant investments are made </li></ul><ul><li>Give freedom of contract to trusted partners: e.g. economies of scale </li></ul><ul><li>Protect from non-loyal suppliers through loyal distributors and clients </li></ul><ul><li>Look beyond your market </li></ul>
    14. 14. The aims of merger and acquisition strategies <ul><li>Mergers and acquisitions strategy, often combined with a diversification strategy, allows a firm to create new competitive advantage and boost its returns to shareholders </li></ul><ul><li>Should be used only when the acquiring firm will be able to increase its economic value through ownership and the use of an acquired firm’s assets </li></ul>
    15. 15. The difference between mergers, acquisitions and takeovers <ul><li>A merger is a strategy through which two firms agree to integrate their operations on a relatively equal basis (DaimlerChrysler) </li></ul><ul><li>An acquisition is a strategy through which one firm buys a controlling interest in another firm with the intent of making it a subsidiary business within its portfolio </li></ul><ul><li>A takeover: a special type of an acquisition strategy wherein the target firm doesn’t solicit the acquiring firm’s bid </li></ul>
    16. 16. M&A is important <ul><li>For large businesses, successful M&A is highly important for managing growth dynamics ( second after the proper choice of market segments ) </li></ul>
    17. 17. Oracle: captured niches and increased market power <ul><li>Spent 2 5 + Bln USD in last five years to buy over 30 IT companies ( last acquisition end of March 2009) </li></ul><ul><li>Hostile takeover of PeopleSoft ( HR solution producer ) for 11 Bln USD </li></ul><ul><li>Acquisition of Siebel Systems ( CRM solutions ), Hyperion (Enterprise Performance Management), Primavera (Project Portfolio Management) and others </li></ul>
    18. 18. Motivation of merger & acquisition transactions <ul><li>Increased market share / increased profitability </li></ul><ul><li>Synergies ( e . g. elimination of identical operations ) </li></ul><ul><li>Scale effects ( procurement / production / sales ) </li></ul><ul><li>Geographic / segment diversification </li></ul><ul><li>Acquisition of competencies / teams / intellectual property </li></ul><ul><li>Tax optimization </li></ul><ul><li>Risk reduction via vertical integration </li></ul>
    19. 19. Increased market power: consolidation in aluminum industry <ul><li>Rio Tinto, one of the world's biggest mining firms, in 2007 acquired Alcan, a Canadian aluminum producer, for 38.1 Bln USD, forming no 1 player (outplayed a hostile takeover by Alcoa at 27 Bln USD). </li></ul><ul><li>UC Rusal was formed by merger of RUSAL, SUAL and aluminum assets of Glencore in 2007 </li></ul>
    20. 20. The group project
    21. 21. M&A in pharma <ul><li>Pfizer : bought Wyeth for 68 Bln USD in Feb 2009 </li></ul><ul><li>Merck: bought Schering-Plough for 41 Bln USD in March 2009 </li></ul><ul><li>Roche: bought remaining 44% shares of Genentech for 47 Bln USD in March 2009 </li></ul><ul><li>Expected benefits : product pipeline ( drugs in final stages of development ), extended patent base , expansion of distribution , reduction of production and R&D costs </li></ul>
    22. 22. Access to technologies : India and global players <ul><li>Hindalco bought Novelis (2007) for 6 Bln USD ( aluminium foil production ) </li></ul><ul><li>Suzlon Energy bought Hansen ( Belgium ) and REpower ( Germany ) ( wind power generators ) </li></ul><ul><li>Generic producer M&A : Ranbaxy, Dr. Reddy’s, Wockhardt </li></ul><ul><li>Steel industry : Tata Steel, Mittal Steel </li></ul>Global M&A transactions with Indian companies , 2000-2009
    23. 23. Expanding across markets via M&A <ul><li>HeidelbergCement acquired Hanson, a British building-materials group, in 2007. Hanson is the biggest maker of aggregates - sand, gravel and crushed stone that are used to produce concrete. </li></ul><ul><li>United Technologies has used acquisitions to build a highly diversified firm in machinery building (which includes Otis Elevator and Carrier divisions) and reduce its dependence on the volatile aerospace industry (Pratt & Whitney, Sikorsky Aircraft) </li></ul>
    24. 24. Types of acquisitions intended to achieve greater market power <ul><li>Horizontal acquisitions: a firm exploits synergies through buying a company competing in the same industry (VW/Seat) </li></ul><ul><li>Vertical acquisitions: a firm purchases a supplier or distributor of its goods or services (Sony/Columbia Pictures) </li></ul><ul><li>Related acquisitions: a firm buys a company in a highly related industry (Oracle/Hyperion) </li></ul>
    25. 25. Related acquisitions: Unicredit <ul><li>UniCredit Group formed by the subsequent merger of several Italian banks in 1998 and 1999 </li></ul><ul><li>After acquisition of Germany’s HBV in 2005 and merger with Capitalia in 2007, has become one of the ten largest banks in the world. Also, gained top position in the Italian market </li></ul><ul><li>Expanded into Eastern Europe since 1999, esp. after acquisition of Pioneer Investments (top foreign player in credit markets in Russia and Ukraine) </li></ul>
    26. 26. Financing M&A transactions <ul><li>Free cash ( liquidity concerns ) </li></ul><ul><li>Share swaps and other payments by stock </li></ul><ul><li>Debt ( incl. leveraged buyout and management buyout transactions) </li></ul><ul><li>Hybrid finance: finance + cash + stock </li></ul><ul><li>Factoring ( buying debt of the target company to its suppliers ) </li></ul>
    27. 27. Гроссмарт: unbalanced growth <ul><li>Гроссмарт retail network ( started as Spar sub-franchisee ) </li></ul><ul><li>Agreed with REWE to develop the retail network BILLA in Russia (2004) </li></ul><ul><li>Expanded via aggressive regional M&A financed by credits and bonds (2005-7). Low rate of shop acquisition by REWE . </li></ul><ul><li>Defaulted on both bonds and credits when financial market situation worsened. Relationship with REWE broken. </li></ul><ul><li>Summer 2008: first bankruptcy in retail </li></ul>
    28. 28. Another victim of unbalanced growth: Базэл / En+ <ul><li>Grew largely on debt borrowed from international banks (LBO scheme and similar) </li></ul><ul><li>Had to return several international assets on ‘margin calls’ since Autumn 2008 </li></ul><ul><li>Estimated assets currently worth 7 Bln USD vs 14 Bln USD debt </li></ul>Базэл activities spread over six divisions, including energy, resources, machinery, aviation, construction and finance
    29. 29. Problems in achieving acquisition success: integration difficulties <ul><li>Integration challenges include melding two disparate corporate cultures, linking different financial and control systems and building effective working relationships </li></ul><ul><li>Maintaining the human capital of the target firm after the acquisition: the loss of key personnel weakens the acquired firm’s capabilities and negatively affects the performance of the merged firm </li></ul>
    30. 30. Problems with acquisitions: inability to achieve synergy <ul><li>A firm develops a competitive advantage through an acquisition strategy only when a transaction generates private synergy </li></ul><ul><li>Created when the combination and integration of the acquiring and acquired firms’ complementary assets yield unique capabilities and core competencies </li></ul><ul><li>Difficult for competitors to understand and imitate, but also difficult to create </li></ul>
    31. 31. Problems with acquisitions: lack of synergies <ul><li>Allianz Group bought Dresdner Bank in 2001 to marry banking, investments and insurance. The cross-selling of banking and insurance products to retail clients turned to work only at the margin </li></ul><ul><li>Sold Dresdner Bank stake to Commerzbank, largely for shares, in August 2008. Transaction to complete end 2009 </li></ul>
    32. 32. M&A problems <ul><li>M&A stress </li></ul><ul><ul><li>productivity reduction due to post-merger reorganization ( up to 25-50%) </li></ul></ul><ul><ul><li>loss of key customers / suppliers </li></ul></ul><ul><ul><li>loss of key management / talent </li></ul></ul><ul><li>Lack of synergy </li></ul><ul><ul><li>gap between corporate cultures too big to close </li></ul></ul><ul><ul><li>synergies overestimated ( e.g. the joint ability to impact the market ) </li></ul></ul><ul><li>M&A success: </li></ul><ul><li>Expected synergies realized in no more than 40% of companies </li></ul><ul><li>Expected ROIC realized in no more than 60% of transactions </li></ul><ul><li>Growth rate increased only for 12% of companies </li></ul>
    33. 33. Attributes of effective acquisitions Acquired firm’s assets and resources are complementary to the acquiring firm’s core business Acquisition is friendly Effective due diligence process to select and evaluate the target firm Acquiring firm has excess cash or a favorable debt position Merged firm maintains low to moderate debt position Acquiring firm has consistent emphasis on R&D and innovation Flexibility and adaptability