Acquisitions B290

Within or Outside One’s Industry Within acquirer's industry Market power Consolidation / horizontal integration Outside the industry Diversification

Success Rate? Most acquisitions do not make money for the shareholders of the acquiring company Asymmetric information Skewed incentives Bidding wars Lack of groundwork / preparation Post merger integration / “culture clash”

Asymmetric Information Target does not disclose (all) its problems To get the best price for its shareholders Acquirer is overly optimistic (hubris) Jay Barney’s coin tossing exercise... Best case scenarios overly optimistic, worst case scenarios seldom sufficiently dire

Skewed incentives Target firm management wants to get the highest price for shareholders Investments banks (independent advisors) Paid ~7% of the acquisition price Would prefer a higher priced deal to a lower one And any deal rather than no deal at all Short term demands of Wall Street Indiscriminate cost cutting

Bidding wars Typically one target, many potential buyers Few firms offer themselves for sale Many first are looking to grow (quickly, by acquisition) Price will typically be above the second highest bidders last bid Asymmetric information, uncertainty, and hubris mean the most wildly optimistic estimate wins

Lack of Groundwork / Preparation Attempts to maintain secrecy means few people are involved Lack of detailed planning before the acquisition leaves problems undiscovered Assumptions of fit and synergy under explored Lack of involvement / ownership from managers who will be responsible for implementation of the integration effort

Post merger integration Insufficiently detailed planning Synergies often mean downsizing some departments Climate of uncertainty and fear Paralysis and departures Culture clash and integration problems

IBM’s acquisition of Rolm “Charles Robbins, an analyst with International Data Corp., states that this move by IBM indicates that the company recognizes the importance of the PBX in its office strategy” Peter Bartolik. Computerworld. Oct 1984. Vol.18, Iss. 40; pg. 1, 2 pgs “The IBM/Rolm systems division lost more than $100m in the first six months of the year … … the synergy the company hoped to foster between computer and switch businesses never materialized, observers said”. Bob Brown. Network World. Nov 14, 1988. Vol. 5, Iss. 46; p. 1 (2 pages) “when IBM's sale of Rolm's manufacturing and development operations is completed in 1989, it will end one of the most embarrassing chapters in recent IBM history”. Robert D. Hof. Business Week. New York: Jul 10, 1989., Iss. 3114; pg. 82, 1 pgs response

IBM’s acquisition of Rolm Lack of understanding of the acquired business Priority 1 service call: 4 hour guaranteed response The blinders of a strong culture (the IBM way) Core competence or core rigidity?

Summary Asymmetric information* Incentives Target does not disclose all its problems in order to get the best price for its shareholders (and management) Acquirer overly optimistic (hubris) Incentives The higher the price the bigger the pay-check Any deal is better than no deal One target company many buyers... Post-integration problems Clash of cultures * Less likely when acquisition is within the industry e.g. BofA, Merrill Lynch, Countrywide liabilities