Definitions Growth Strategy- An organization substantially broadens the scope of one or more of its business in terms of their respective customer group, customer functions and alternative technologies to improve its overall performance. Types of Growth Strategies Internal External
JOINT VENTURE An entity formed between two or more parties to undertake a specified activity together. Parties agree to create a new entity by both contributing equity, and they then share revenue, expenses, and control of the enterprise. The venture can be for one specific project only or a continuing business relationship Eg: Sony Ericsson. Unlike mergers and acquisitions, in joint venture the parent companies does not cease to exist. Types of Joint Ventures (a) Between 2 Indian org. in one industry (b) Between 2 Indian org. across different industries. (c) Between an Indian org. & a foreign org. in India. (d) Between an Indian org. & a foreign org. in that foreign country. (e) Between an Indian org. & a foreign org. in third country.
Joint VentureMarutiUdyog Ltd. & Suzuki Motor Corp. Maruti Suzuki is one of India's leading automobile manufacturers and the market leader in the car segment, both in terms of volume of vehicles sold and revenue earned. Until recently, 18.28% of the company was owned by the Indian government, and 54.2% by Suzuki of Japan. The Indian government held an initial public offering of 25% of the company in June 2003. As of May 10, 2007, Govt. of India sold its complete share to Indian financial institutions. With this, Govt. of India no longer has stake in MarutiUdyog. During 2007-08, Maruti Suzuki sold 764,842 cars, of which 53,024 were exported. In all, over six million Maruti cars are on Indian roads since the first car was rolled out on December 14, 1983.
Merger Vs. Takeover UsuallyMergers are friendly Hostile Merger = Takeover Merger Vs. Amalgamation
In merger two firms, agree to move ahead and exist as a single new company. Merger can be merger of equals : both companies are of equal sizes. merger of unequal's : large company merge with smaller one Voluntary process : consent of both companies. Name of new merged entity is usually a combination of both parent companies Mergers are mostly financed by a stock swap. Both companies surrender their stocks and stock of the new company is issued as a replacement. MERGERS
Types of Merger Horizontal merger : When two merging companies are of the same industry and produce similar products. Example : Footwear Company Merging with Footwear company Vertical merger : When two companies are producing the same goods, but are at different stages, it is a vertical merger. Example : Footwear Company Merging with Leather Tannery Concentric merger : when two companies are related to each other in terms of customer functions or customer groups. Example : Footwear Company Merging with another specialty Footwear Company Conglomerate merger : When two companies operate in different industries. Example : Footwear Company Merging with Pharmaceutical Firms
Are all Mergers successful?Hindalco-Novelis (failure) Hindalco (metal maker of Birla group) acquired Novelis for a staggering $ 5.76 billion.Novelis , on a net worth of $ 322 million, had a debt of $ 2.33 billion Hindalco took $ 3.13 bn loan to aquireNovelis. Right after the acquisition hindalco came on a rough road. With the debt market tightening , the metal maker is left with no choice but to dilute its equity through a 1:3 rights issue. Further, high interest costs, which rose by over 490 % loan increased from Rs 3.13 billion in FY 07 to Rs 18.49 billion in FY 08. Finally Hindalco’s earning per share in FY08 dropped to Rs.15.76, from Rs. 26.73 in FY07, a fall of 41% !
AQUISITION Acquisition is a deal when one company takes over another company and buyer becomes sole proprietor. At times takeover occurs when the target company does not want to be purchased. However with better offering of prices shareholder are attracted by acquirer. In legal terms, the target company ceases to survive. The buyer swallows the company and the buyer's stock continues to be traded. Unlike mergers which are friendly, acquisitions can be friendly and unfriendly.
Why M & As? To reduce competition. To increase growth rate & capture a greater market share To improve value of organization’s stock. To acquire a needed resource quickly. To take advantage of synergy. To acquire resources to stabilize operations. To achieve economies of scale.
Reduced competition may even facilitate monopolistic or oligopolistic tendencies among firms. Increase of prices. Job losses for employees. Difficulties in cultural integration of the merging firms. Interest of minority shareholders is not protected. Disadvantages of M&A
Tata Steel and Corus On January 31, 2007, Tata Steel Limited, one of the leading steel producers in India, acquired the Anglo Dutch steel producer Corus Group for US$ 12.11 billion. Corus was 2.5 times bigger company than TATA. It took nine rounds for Tata to acquire Corus. In the first bid Tata had closed the deal at US $ 7.6 bn and later it ended up by paying US $ 12.11 bn, making it an expensive turnover. This acquisition was the biggest overseas acquisition by an Indian company. Tata Steel emerged as the fifth largest steel producer in the world. After acquisition Tata benefited itself from Corus: Distribution network of Europe. expertise in steel making for automobiles. In return Corus benefit itself from Tata Steel's expertise in low cost manufacturing of steel.
Strategic alliances A strategic alliance is a form of affiliation that involves a mutual sharing of resources or “partnering” to improve efficiency. In strategic alliances, the focus is on “sharing” of resources rather than seeking change in control. Equity investment in each others company is not any focus. Types of strategic alliances :
Non competitive alliances: Intra industry partnerships b/w noncompetitive firms
like two firms in same industry but different geographical locations. Competitive alliance: partnerships which brings two rival firms in a cooperative arrangement where intense interaction is necessary. Pre competitive alliance : partnerships which brings two firms of different industry together to work on well defined industries such as new technology development.
Reasons for Strategic Alliances Market entry -A strategic alliance can ease entry into a foreign market . Eg: strategic alliance between British Airways and American Airlines. Share risk & expenses -firms involved can share risks. Eg: In early 1990’s film manufacturers Kodak and Fuji joined with camera manufacturers Nikon, Canon, and Minolta to create cameras and film for an "Advanced Photo System. Synergistic Effects of Shared Knowledge and Expertise- help a firm gain knowledge and expertise Skills+ brand + market knowledge+ assets= synergizing effect Eg: For example, in the early 1990s, Motorola initiated an alliance among various partners, including Raytheon, Lockheed Martin, China Great Wall, and Nippon Iridium, to develop and build a global satellite-based communications network. Gaining Competitive Advantage
Lack of trust & commitment. Perceived misunderstanding among partners. Conflicting goals & interests. Inadequate preparation for entering into partnership. Hasty implementation of plans. Pitfalls
Jet airways-Kingfisher Alliancemarket leaders with share of Jet – 30% kingfisher – 29% Economic slowdown and high ATF prices resulted in decline of air travel both in international and domestic segments of the air travel market. Airline sector is set to incur a loss of $ 2bn (Rs.10,000 Crore) this year Thus Jet and Kingfisher have decided to form an alliance in fields including fuel management, ground handling, sharing of technical resources and crew for training and cross-utilization on similar aircraft types. This will help both carriers to significantly rationalize and reduce costs and provide improved standards of service and a wider choice of air travel options to consumers with immediate effect. They could not merge as of rule that two airline companies with combined market share greater than 40 % can not merge in India. So they formed an alliance.
MERGER AQUISITION Usually two companies of equal size merge Together. Voluntary and friendly process Stock swap : both companies surrender their stocks and stocks of new companies are given as replacement. Parent companies cease to exist. Large company takes over the smaller Company. Often forceful or unfriendly where larger company attracts the shareholders of target company by offering them better price for their shares. Parent companies cease to exist. JOINT VENTURE STRATEGIC ALLIANCE Two or more companies agree to form an Entity for a specific task or period. Always friendly. One company receives financial assistance, Managerial inputs and technological inputs from superior company. Parent companies keep functioning in their Respective areas. To improve efficiency of companies. Includes no equity investments. Parent companies keep functioning as normal by supporting each other.