Week 9 – Mergers and Acquisitions

Learning outcomes Identify key issues in the successful management of mergers and acquisitions. Determine the appropriate choices between organic development, mergers and acquisitions and strategic alliances. Compare key success factors in mergers, acquisitions and alliances. Understand primary evaluation criteria for strategic growth

Strategy methods Last week Last week 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. A strategic alliance is where two or more organisations share resources and activities to pursue a strategy. Joint venture is a special case of Strategic alliance. Last week Figure 10.1 Three strategy methods

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’. Friendly acquisition: agreed between two firms. Management in target firm recommends to shareholders to accept deal. Hostile acquisition: would-be acquirer offer a price for the shares without the agreement of the target’s management. Example of acquisition: our campus!

The formation processes of M&As

M&A Worldwide Institute of Mergers, Acquisitions and Alliances (2012) http://www.imaa-institute.org/statistics-mergers-acquisitions.html#MergersAcquisitions_Worldwide Institute of Mergers, Acquisitions and Alliances (2012)

Why do you think companies engage in M&A?

Strategic motives for M&A Strategic motives can be categorised in three ways: Speed of entry – rapid change in products or markets, quick action is the only way. Consolidation – increasing scale, efficiency and market power. Capabilities – enhancing technological know-how (or other competences). Consolidation example: dating websites (Metaflake estimates there are 50 online dating sites with more than 100,000 members operating in the UK, suggesting the prospect of further consolidation. http://www.guardian.co.uk/lifeandstyle/2012/nov/26/nine-million-britons-use-online-dating )

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. International difference or offsetting debt of target Asset stripping or unbundling – selling off bits of the acquired company to maximise asset values.

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. 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. 'Bandwagon Effect‘: A psychological phenomenon whereby people do something primarily because other people are doing it, regardless of their own beliefs, which they may ignore or override. The bandwagon effect has wide implications, but is commonly seen in politics and consumer behavior. This phenomenon can also be seen during bull markets and the growth of asset bubbles. Risk: possibly value destruction rather than creation

M&A in Software Institute of Mergers, Acquisitions & Alliances (2012) http://www.imaa-institute.org/statistics-mergers-acquisitions.html#MergersAcquisitions_Worldwide Institute of Mergers, Acquisitions & Alliances (2012)

M&A in Banking Institute of Mergers, Acquisitions and Alliances (2012) http://www.imaa-institute.org/statistics-mergers-acquisitions.html#MergersAcquisitions_Worldwide Institute of Mergers, Acquisitions and Alliances (2012)

How to identify a suitable target for M&A?

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?

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’. Premium minimum 30% RBS war with Barclays to buy Dutch ABN AMRO make it pay Euro 70bn eventually collapsed and needed bail out

M&A AND FINANCIAL PERFORMANCE Over 50% of acquisitions end up with lower returns to shareholders of both organisations. Why? Paying too much over-optimism about the benefits of the acquisition Capabilities of the merging organisations are not compatible

Comparing acquisitions, alliances and organic development Buy, ally or DIY matrix Johnson Whittington and Scholes, 2012)

Key success factors Figure 10.6 Key success factors in mergers, acquisitions and alliances

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.

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.