SM Lecture Eight - Mergers, Acquisitions and Alliances


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SM Lecture Eight - Mergers, Acquisitions and Alliances

  1. 1. Strategic Management BUSM 3200 These Lecture Slides summarize the key points covered in the respective chapters in your recommended text; these slides do NOT substitute, at all, the required reading of the assigned chapter from the text. These slides also may contain additional supplementary material extracted from other texts and sources outside your text book.BUSM 3200- Strategic Management (Jan 2013) GDS 1-1
  2. 2. Learning outcomes Establish the potential role of organic (‘do it yourself’) strategies. Identify key issues in the successful management of mergers and acquisitions. Identify the key issues in the successful management of strategic alliances. Determine the appropriate choices between organic development, mergers and acquisitions and strategic alliances. Compare key success factors in mergers, acquisitions and alliances.BUSM 3200- Strategic Management (Jan 2013) GDS 8-2
  3. 3. Three Strategy Methods Figure 10.1 Three strategy methodsBUSM 3200- Strategic Management (Jan 2013) GDS 8-3
  4. 4. Organic development Organic development is where a strategy is pursued by building on and developing an organisation’s own capabilities. This is essentially the ‘do it yourself’ method.BUSM 3200- Strategic Management (Jan 2013) GDS 8-4
  5. 5. Advantages of organic development Knowledge and learning can be enhanced. Spreading investment over time – easier to finance. No availability constraints – no need to search for suitable partners or acquisition targets. Strategic independence – less need to make compromises or accept strategic constraints.BUSM 3200- Strategic Management (Jan 2013) GDS 8-5
  6. 6. Corporate entrepreneurship Corporate entrepreneurship refers to radical change in the organisation’s business, driven principally by the organisation’s own capabilities. For example, Amazon’s development of Kindle using its own in house development .BUSM 3200- Strategic Management (Jan 2013) GDS 8-6
  7. 7. Mergers and acquisitions  A merger is the combination of two previously separate organisations, typically as more or less equal partners.  An acquisition involves one firm taking over the ownership (‘equity’) of another, hence the alternative term ‘takeover’.BUSM 3200- Strategic Management (Jan 2013) GDS 8-7
  8. 8. Strategic motives for M&A Strategic motives can be categorised in three ways:  Extension – of scope in terms of geography, products or markets.  Consolidation – increasing scale, efficiency and market power.  Capabilities – enhancing technological know-how (or other competences).BUSM 3200- Strategic Management (Jan 2013) GDS 8-8
  9. 9. Financial motives for M&A There are three main financial motives:  Financial efficiency – a company with a strong balance sheet (cash rich) may acquire/merge with a company with a weak balance sheet (high debt).  Tax efficiency – reducing the combined tax burden.  Asset stripping or unbundling – selling off bits of the acquired company to maximise asset values.BUSM 3200- Strategic Management (Jan 2013) GDS 8-9
  10. 10. Managerial motives for M&A M&A may serve managerial self-interest for two reasons:  Personal ambition – financial incentives tied to short-term growth or share-price targets; boosting personal reputations; giving friends and colleagues greater responsibility or better jobs.  Bandwagon effects – managers may be branded as conservative if they don’t follow a M&A trend; shareholder pressure to merge or acquire; the company may itself become a takeover target.BUSM 3200- Strategic Management (Jan 2013) GDS 8-10
  11. 11. Target choice in M&A Two main criteria apply: Strategic fit – does the target firm strengthen or complement the acquiring firm’s strategy? (N.B. It is easy to over-estimate this potential synergy). Organisational fit – is there a match between the management practices, cultural practices and staff characteristics of the target and the acquiring firm?BUSM 3200- Strategic Management (Jan 2013) GDS 8-11
  12. 12. Strategic Outcomes for Horizontal Mergers and Acquisitions ♦ Increasing the firm‟s scale of operations and market share. ♦ Expanding a firm‟s geographic coverage. ♦ Extending the firm‟s business into new product categories. ♦ Gaining quick access to new technologies or complementary resources and capabilities. ♦ Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities. 8-12Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–12
  13. 13. Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results ♦ Strategic Issues: ● Cost savings may prove smaller than expected. ● Gains in competitive capabilities take longer to realize or never materialize at all. ♦ Organizational Issues ● Corporate cultures, operating systems and management styles fail to mesh due to resistance to change from organization members. ● Loss of key employees at the acquired firm. ● The managers overseeing the integration make mistakes in melding the acquired firm into their own. 8-13Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–13
  14. 14. Valuation in M&A Getting the offer price correct is essential:  Offer the target too little, and the bid will be unsuccessful.  Pay too much and the acquisition is unlikely to make a profit net of the original acquisition price. (‘the winner’s curse’).  Acquirers do not simply pay the current market value of the target, but also pay a ‘premium for control’.BUSM 3200- Strategic Management (Jan 2013) GDS 8-14
  15. 15. Integration in M&A Figure 10.2 Acquisition integration matrix Source: P. Haspeslagh and D. Jemison, Managing Acquisitions, Free Press, 1991BUSM 3200- Strategic Management (Jan 2013) GDS 8-15
  16. 16. Integration in M&A Approaches to integration:  Absorption – strong strategic interdependence and little need for organisational autonomy. Rapid adjustment of the acquired company’s strategies, culture and systems.  Preservation – little interdependence and a high need for autonomy. Old strategies, cultures and systems can be continued much as before.  Symbiosis – strong strategic interdependence, but a high need for autonomy. Both the acquired firm and acquiring firm learn and adopt the best qualities from each other.  Holding – a residual category – with little to gain by integration. The acquisition will be ‘held’ temporarily before being sold on, so the acquired unit is left largely alone.BUSM 3200- Strategic Management (Jan 2013) GDS 8-16
  17. 17. Strategic alliances A strategic alliance is where two or more organisations share resources and activities to pursue a strategy. Collective strategy is about how the whole network of alliances of which an organisation is a member competes against rival networks of alliances. Collaborative advantage is about managing alliances better than competitors.BUSM 3200- Strategic Management (Jan 2013) GDS 8-17
  18. 18. Types of strategic alliance There are two main kinds of ownership in strategic alliances:  Equity alliances involve the creation of a new entity that is owned separately by the partners involved.  Non-equity alliances are typically looser, without the commitment implied by ownership.BUSM 3200- Strategic Management (Jan 2013) GDS 8-18
  19. 19. Equity alliances The most common form of equity alliance is the joint venture, where two organisations remain independent but set up a new organisation jointly owned by the parents. A consortium alliance involves several partners setting up a venture together.BUSM 3200- Strategic Management (Jan 2013) GDS 8-19
  20. 20. Non-equity alliances Non-equity alliances are often based on contracts. Three common forms of non- equity alliance:  Franchising.  Licensing.  Long-term subcontracting.BUSM 3200- Strategic Management (Jan 2013) GDS 8-20
  21. 21. Benefits of Strategic Alliances and Partnerships ♦ Minimizes the problems associated with vertical integration, outsourcing, and mergers and acquisitions. ♦ Useful in extending to extend the scope of operations via international expansion and diversification strategies. ♦ Reduces the need to be independent and self-sufficient when strengthening the firm‟s competitive position. ♦ Offers greater flexibility should a firm‟s resource requirements or goals change over time. ♦ Are useful when industries are experiencing high- velocity technological advances simultaneously. 8-21Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–21
  22. 22. Reasons for Entering into Strategic Alliances ♦ When seeking global market leadership: ● Enter into critical country markets quickly. ● Gain inside knowledge about unfamiliar markets and cultures through alliances with local partners. ● Provide access to valuable skills and competencies concentrated in particular geographic locations. ♦ When staking out a strong industry position: ● Establish a stronger beachhead in target industry. ● Master new technologies and build expertise and competencies. ● Open up broader opportunities in the target industry. 8-22Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–22
  23. 23. Capturing the Benefits of Strategic Alliances Being sensitive to cultural differences Recognizing that Picking a good the alliance must partner benefit both sides Strategic Alliance Factors Ensuring both Adjusting the parties keep their agreement over commitments time to fit new Structuring the circumstances decision-making process for swift actions 8-23Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–23
  24. 24. Factors That Make an Alliance “Strategic” ♦ It helps build, sustain, or enhance a core competence or competitive advantage. ♦ It helps block a competitive threat. ♦ It increases the bargaining power of alliance members over suppliers or buyers. ♦ It helps open up important new market opportunities. ♦ It mitigates a significant risk to a firm‟s business. 8-24Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–24
  25. 25. Motives for alliances Scale alliances – lower costs, more bargaining power and sharing risks. Access alliances – partners provide needed capabilities (e.g. distribution outlets or licenses to brands) Complementary alliances – bringing together complementary strengths to offset the other partner’s weaknesses. Collusive alliances – to increase market power. Usually kept secret to evade competition regulations.BUSM 3200- Strategic Management (Jan 2013) GDS 8-25
  26. 26. Strategic alliance motives Figure 10.3 Strategic alliance motivesBUSM 3200- Strategic Management (Jan 2013) GDS 8-26
  27. 27. Strategic alliance processes Two themes are vital to success in alliances: Co-evolution – the need for flexibility and change as the environment, competition and strategies of the partners evolve. Trust – partners need to behave in a trustworthy fashion throughout the alliance.BUSM 3200- Strategic Management (Jan 2013) GDS 8-27
  28. 28. Alliance evolution Figure 10.4 Alliance evolution Source: Adapted from E. Murray and J. Mahon (1993), „Strategic alliances: gateway to the new Europe‟, Long Range Planning, vol. 26, p. 109. 3200- Strategic Management (Jan 2013) GDS 8-28
  29. 29. The Drawbacks of Strategic Alliances and Partnerships ♦ Culture clash and integration problems due to different management styles and business practices. ♦ Anticipated gains do not materialize due to an overly optimistic view of the synergies or a poor fit of partners‟ resources and capabilities. ♦ Risk of becoming dependent on partner firms for essential expertise and capabilities. ♦ Protection of proprietary technologies, knowledge bases, or trade secrets from partners who are rivals. 8-29Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–29
  30. 30. Principle Advantages of Strategic Alliances ♦ They lower investment costs and risks for each partner by facilitating resource pooling and risk sharing. ♦ They are more flexible organizational forms and allow for a more adaptive response to changing conditions. ♦ They are more rapidly deployed—a critical factor when speed is of the essence. 8-30Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–30
  31. 31. Strategic Alliances Versus Outsourcing ♦ Key Advantages of Strategic Alliances: ● The increased ability to exercise control over the partners‟ activities. ● A greater commitment and willingness of the partners to make relationship-specific investments as opposed to arm‟s-length outsourcing transactions. 8-31Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–31
  32. 32. How to Make Strategic Alliances Work ♦ Create a system for managing the alliance. ♦ Build trusting relationships with partners. ♦ Set up safeguards to protect from the threat of opportunism by partners. ♦ Make commitments to partners and see that partners do the same. ♦ Make learning a routine part of the management process. 8-32Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–32
  33. 33. Comparing acquisitions, alliances and organic development Figure 10.5 Buy, ally or DIY matrixBUSM 3200- Strategic Management (Jan 2013) GDS 8-33
  34. 34. Comparing acquisitions, alliances and organic development Four key factors in choosing the method of strategy development :  Urgency – internal development may be too slow, alliances can accelerate the process but acquisitions are quickest.  Uncertainty – an alliance means risks are shared and thus a failure does not mean the full cost is lost.  Type of capabilities – acquisitions work best with ‘hard’ resources (e.g. production units) rather than ‘soft’ resources (e.g. people). Culture clash is the big issue.  Modularity of capabilities – if the needed capabilities can be clearly separated from the rest of the organisation an alliance may be best.BUSM 3200- Strategic Management (Jan 2013) GDS 8-34
  35. 35. Key success factors Figure 10.6 Key success factors in mergers, acquisitions and alliancesBUSM 3200- Strategic Management (Jan 2013) GDS 8-35
  36. 36. Summary (1) There are three broad methods for pursuing strategy: mergers and acquisitions, strategic alliances and organic development. Organic development can be either continuous or radical. Radical organic development is termed corporate entrepreneurship. Acquisitions can be hostile or friendly. Motives for mergers and acquisitions can be strategic, financial or managerial.BUSM 3200- Strategic Management (Jan 2013) GDS 8-36
  37. 37. Summary (2) The acquisition process includes target choice, valuation and integration. Strategic alliances can be equity or non-equity. Key motives for strategic alliances include scale, access, complementarity and collusion. The strategic alliance process relies on co- evolution and trust. The choice between acquisition, alliance and organic methods is influenced by four key factors: urgency, uncertainty, type of capabilities and modularity of capabilities.BUSM 3200- Strategic Management (Jan 2013) GDS 8-37
  38. 38. PRACTICE ESSAY QUESTIONS IMPORTANT NOTE: →  These questions are provided for your reference only – they are only INDICATIVE of the standard of questions you might expect in the final exam.  DO NOT use these questions to “spot”  The RMIT examiner will post advice on the exam on the Learning Hub closer to the exam; you are required to pay attention to that advise  The questions here show the range of topics that could be tested from this lecture; they are NOT exhaustive  To score a high grade it is important to LINK the theory to applications and examples. Where from?  You have been assigned specific cases to read from the text. Each case study will show you the kinds of strategic decisions the case company needs to make. You can draw from these examples.  You have selected a case company for your project; you may use examples from there.  You are supposed to read widely from the business press about local, regional and international companies strategies. You can use examples from there as well.BUSM 3200- Strategic Management (Jan 2013) GDS 8-38
  39. 39. Sample essay question 1. Discuss the main catalysts for diversification. Examine the risks and advantages of joint ventures, mergers and strategic alliances using examples from two of the cases studied during this course. 2. Mergers and acquisitions (M&A) is an important method for strategy development. In the case of SABMiller’s proposed acquisition of Foster’s, discuss the major motive for SABMiller and elaborate how well Foster’s may fit SABMiller strategically and organisationally.BUSM 3200- Strategic Management (Jan 2013) GDS 8-39
  40. 40. Sample essay question 3. What are the differences in a merger, joint venture and strategic alliance? What are the advantages and risks of each of these diversification strategies? Give examples from the XYZ case study to support your answer. XYZ : this means that you may be asked to comment on one or more of the assigned cases that are identified in your course schedule.BUSM 3200- Strategic Management (Jan 2013) GDS 8-40