MKT 450 Strategic Management Mishari Alnahedh

LECTURE 10: GROWTH STRATEGIES

Mergers and Acquisitions Mishari Alnahedh A merger is a strategy through which two firms agree to integrate their operations on a relatively equal basis, because they have resources and capabilities that together may create a stronger competitive advantage. An acquisition is a strategy through which one firm buys a controlling or 100 percent interest in another firm with the intent of using a core competence more effectively by making the acquired firm a subsidiary business within its portfolio.

The phenomenon of the winner’s curse. Mergers and Acquisitions Mishari Alnahedh A takeover is a type of an acquisition strategy wherein the target firm did not solicit the acquiring firm’s bid. The phenomenon of the winner’s curse. The most optimistic bidder usually over-estimates the true value of the firm

Mergers and Acquisitions Mishari Alnahedh Trying to gain sustainable competitive advantage via mergers and acquisitions puts us right up against the “efficient market” wall. If an industry is generally known to be highly profitable, there will be many firms bidding on the assets already in the market. Generally the discounted value of future cash flows will be impounded in the price that the acquirer pays. Thus, the acquirer is expected to make only a competitive rate of return on investment.

Increasing use of mergers & acquisitions Mergers and Acquisitions Mishari Alnahedh Increasing use of mergers & acquisitions 1980s: 55,000 M&As: total value $1.3 trillion 1998: total value $2.5 trillion 1999: total value $3.4 trillion In United States 1998: total value $1.6 trillion 1999: total value $1.75 trillion

Mergers and Acquisitions Mishari Alnahedh

Acquiring Resources or Capabilities The Motives for Mergers & Acquisitions Mishari Alnahedh Acquiring Resources or Capabilities Some resources and capabilities not transferable or replicable: to obtain them may require acquiring the entire company (e.g. Disney and Pixar) Acquisitions are especially important for established companies seeking to acquire emerging technologies (during 2005-11, Google acquired 95 firms and Microsoft 71) Cost Economies and Market Power Horizontal mergers (especially between competitors) offer clearest benefits from mergers in terms of scale economies and market power (e.g. United and Continental airlines; Exxon and Mobil) © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Geographic Extension Diversification The Motives for Mergers & Acquisitions Mishari Alnahedh Geographic Extension Acquisition is the most popular means of entry into foreign markets by companies. Allows acquiring firm to gain critical mass and overcome “liabilities of foreignness” Diversification Acquisition is the predominant mode of diversification by firms © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Problems in Achieving Success Reasons for Acquisitions Problems in Achieving Success Increased market power Overcome entry barriers Lower risk compared to developing new products Cost of new product development Increased speed to market diversification Avoid excessive competition Integration difficulties Inadequate evaluation of target Too much diversification Large or extraordinary debt Inability to achieve synergy Managers overly focused on acquisitions Too large Acquisitions

Reasons for Acquisitions Mishari Alnahedh Increased Market Power e.g., BP Amoco attempt to acquire Arco Overcome Entry Barriers e.g., entry into international markets Lower Cost of New Product Development Increased Speed to Market e.g., BMW’s acquisition of Rover Avoiding Excess Competition e.g., General Electric’s acquisition of NBC

Problems with Acquisitions Mishari Alnahedh Integration Difficulties e.g., Pillsbury and Burger King Inadequate Evaluation of Target e.g., Bridgestone acquisition of Firestone Inability to Achieve Synergy e.g., AT&T and NCR Overly Diversified e.g, GE -- prior to refocusing Overly Focused on Acquisitions e.g., Conglomerates of 1960s

Consequences of Mergers & Acquisitions Mishari Alnahedh Financial Outcomes Many studies, inconsistent results In terms of returns to shareholders, main finding is that shareholders of acquiring firms lose; shareholders of acquired firms gain; combined impact a v. small gain If acquisitions destroy value for the acquirer, why do they happen? Motivated by managerial goals (e.g. growth) Imitation (e.g. internationalization by banks, merger wave among petroleum firms) Acquiring firms overestimate the benefits, underestimate the costs Learning effects Some firms are more successful acquirers than others. Acquisition capability the result of (a) learning through experience (b) systematizing the approach to acquisition management © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Attributes Results Attributes of Effective Acquisitions Mishari Alnahedh Attributes Results Complementary Assets or Resources Buying firms with assets that meet current needs to build competitiveness Friendly Acquisitions Friendly deals make integration go more smoothly Careful Selection Process Deliberate evaluation and negotiations are more likely to lead to easy integration and building synergies Maintain Financial Slack Provide enough additional financial resources so that profitable projects would not be foregone

Attributes Results Attributes of Effective Acquisitions Mishari Alnahedh Attributes Results Low-to-Moderate Debt Merged firm maintains financial flexibility Sustain Emphasis on Innovation Continue to invest in R&D as part of the firm’s overall strategy Flexibility Has experience at managing change and is flexible and adaptable

Under what scenarios can the bidder do well? Sustainable Competitive Advantage Mishari Alnahedh Under what scenarios can the bidder do well? (1) Luck (2) Asymmetric Information This eliminates the competitive bidding premise implicit in the “efficient market hypothesis” (3) Specific synergies between the bidder and the target Once again, this eliminates the competitive bidding premise of the efficient market hypothesis.

Biggest Mergers & Acquisitions, 1990-2012 Mishari Alnahedh Year Purchaser Purchased Value ($bn.) 2000 Vodafone Airtouch Mannesmann 183 Online Inc. Time Warner 165 1999 Pfizer Warner-Lambert 90 2007 Royal Bank of Scotland, Banco Santander, Fortis ABN-AMBRO 79 Glaxo Wellcome Plc. SmithKline Beecham Plc. 76 2004 Royal Dutch Petroleum Co. Shell Transport & Trading Co 75 Citicorp Travelers Group 73 2006 AT&T Inc. BellSouth Corporation 2001 Comcast Corporation AT&T Broadband & Internet 72 2009 Wyeth 68 SBC Communications Ameritech Corporation 63 Sanofi-Synthelabo SA Aventis SA 60 Vodafone Group AirTouch Communications 2002 Pfizer Inc. Pharmacia Corporation Enel SpA Endesa SA JP Morgan Chase & Co Bank One Corp 59 Procter & Gamble Gillette 57 2008 InBev Anheuser-Busch 52 Bank of America Merrill Lynch 50 © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Alliances & Joint Ventures: Management Issues Mishari Alnahedh Benefits Combining resources and capabilities of different companies Learning from one another Reducing time-to-market for innovations Risk sharing Problems Management differences between the two partners. Conflict most likely where the partners are also competitors © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Alliances & Joint Ventures: Management Issues Mishari Alnahedh Benefits are seldom shared equally. Distribution of benefits determined by: Strategic intent of the partners- which partner has the clearer vision of the purpose of the alliance? Appropriability of the contribution-- which partner’s resources and capabilities can more easily be captured by the other? Absorptive capacity of the company-- which partner is the more receptive learner? © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

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