International Strategy and Organization Internationalization through Mergers and Acquisitions ALVES, João BORREGO DO VALE, João LAGINHA, Luís NUNES, Bruno

Overview - 1 Alliances vs. Acquisitions The Value of M&A Strategies Performance Implications of M&A Reasons for M&A Sustained Competitive Advantage Implications for Bidding Firm Managers Implications for Target Firm Managers

Overview - 2 Decision of Internationalization Entry Modes Problems in Entry Modes Performance of M&As Synergy Realization of M&As Case Study: “Mannesmann and Vodafone: The unfriendly takeover”

Alliances vs. Acquisitions Alliances allow simultaneous and fast entering into multiple countries Objective: achieve complementary capabilities or economies of scale Do not have high risks of failure and high transaction costs

Alliances vs. Acquisitions Acquisitions allow for a greater rationalization than alliances In alliances all decisions must be made by consensus among the partner firms Alliances are transient in nature and must remain reversible

Alliances vs. Acquisitions Alliances are inherently less efficient than acquisitions Future alliances might be formed as a first step toward a merger Alliances make it possible to avoid the culture shock in the wake of an acquisition

The Value of M&A Strategies The unrelated case NPV(A+B) = NPV(A) + NPV(B) P = NPV(A+B) – NPV(A) Only generates normal economic profit The related case NPV(A+B) > NPV(A) + NPV(B)

M&A: The Related Case FTC Categories Vertical Merger Horizontal Merger Product Extension Merger Market Extension Merger Conglomerate Merger Lubatkin (1983): Technical economies Pecuniary economies Diversification economies

M&A: The Related Case Jensen and Ruback (1983): To reduce production or distribution costs 1. Through economies of scale 2. Through vertical integration 3. Through the adoption of more efficient production or organizational technology 4. Through the increased utilization of the bidder’s management team 5. Through a reduction of agency costs by bringing organization-specific assets under common ownership

M&A: The Related Case Jensen and Ruback (1983) (cont.): Financial motivations 1. To gain access to underutilized tax shields 2. To avoid bankruptcy costs 3. To increase leverage opportunities 4. To gain other tax advantages To gain market power in product markets To eliminate inefficient target management

Performance Implications of M&A The more strategically related bidding and target firms are, the more economic value M&A create Economic value appropriated by the owners of the target firm Why do managers of bidding firms continue to engage in M&A strategies?

Reasons for M&A Ensuring survival Free cash flow Agency problems Managerial hubris The potential for above-normal profits

Sustained Competitive Advantage To generate above-normal profits Valuable, rare, and private synergies between bidding and target firms Valuable, rare, and costly-to-imitate synergies between bidding and target firms Unexpected valuable synergies between bidding and target firms

Implications for Bidding Firm Managers Search for valuable and rare synergies Keep information away from other bidders Keep information away from targets Avoid winning bidding wars Close the deal quickly

Implications for Target Firm Managers Seek information from bidders Invite other bidders to join the bidding competition Delay but do not stop the acquisition

Decision of Internationalization Knowledge Clusters Interrelated groups of firms Technology leading firms Highly skilled labor In urban areas or regions nearby Incentives to not enter into Knowledge Spillovers Locals may imitate know-how

Entry modes 3 Entry Type Modes Greenfield Investment Joint Venture Acquisition Greenfield Investment (79%) Acquisition (15%) Joint Venture (6%)

Assets Acquisition Problem if acquired have a high ratio of undesired resources Advantage to ‘plug into’ a local firm Greenfield Investment Gradually develop its own network Joint Ventures Only have access to selected assets

Problems in Entry Modes Assets Absorptive Capacity Social Entry Barriers Local Labor Market Institutions and Membership

Problem of Absorptive Capacity Entry ModeAdvantagesDisadvantages Greenfield Investment Slow and expensive communication process May fail to build own code books Joint VentureAccess to local 'interpreter'Internal communication problems Risk of imitation by partner firm AcquisitionAcquisition of code books Long process of constructing code books ‘Interpreter’ for the firm Transfer knowledge from local do global Preferred should be Acquisition

Problem of Social Entry Barriers Entry ModeAdvantagesDisadvantages Greenfield Investment Lower social entry barriers through signaling commitment Slow and expensive trust-building process May remain an outsider Joint Venture Lowering social barriers through preserving local 'flavor' Access to indirect networks through local partner firm Acquisition Acquisition of direct networksHostile acquisitions may raise social entry barriers Acquisition of indirect networks through employees' social relations Direct networks may dissolve after acquisitions Employees key to indirect networks may leave after acquisition

Local Labor Market Entry ModeAdvantagesDisadvantages Greenfield Investment Less insecure hiring processSlow hiring process Joint Venture Access to partner firms' laborScale problems Acquisition Acquisition of laborKnowledgeable employees may leave after acquisition Condemned by local firms – firms should avoid the raise social barriers Personnel may want to quit after acquisition Joint Venture may be more costly than acquisition

Institutions and Membership Entry ModeAdvantagesDisadvantages Greenfield Investment Slow and expensive process of becoming a member Joint Venture Access to membership through local partner firm Risk of partner firm appropriating benefits Acquisition Acquisition of membership through employees Employees key to membership may leave after acquisition Specialized firms and educations and research institutions Creation of shared codebooks Same problem as in the social entry barriers

Performance of M&As Strategic Management Economics Finance Organizational Research Human Resources Management

Synergy Realization of M&As M&As success is calibrated by the degree of synergy realization Combination potential Organizational integration Lack of employee resistance

Achieving Synergies through Combination Potential “Economies of sameness” – similar operations “Economies of fitness” – different, but complementary operations Operational synergies Administration synergies Managerial synergies Financial synergies

Achieving Synergies through Organizational Integration Degree of interaction (the greater it is, the greater the degree of synergy realization) Coordinative effort to improve the quality of interaction (with special integrators, transition teams and preplanning Little, or poorly executed, interaction and coordination are unlikely to produce substantial joint benefits

Employee resistance, undermining synergy realization M&As affect career plans M&As create appearance of psychological problems such as: “We versus they” antagonism Condescending attitudes Distrust, Tension and Hostility Grave cultural problems Occur more with similarities in operations than in differences

Other important factors of synergy realization Management style similarity Attenuates employee resistance Cushions the degree of change and enhances cooperation Cross-border Combination Impede the interaction and coordination because of country differences Culture clashes promoting employee resistance May speed new markets access and promote globalization synergies Relative Size Insufficient managerial attention to smaller targets Positively associated Organizational integration

Case Study Mannesmann and Vodafone – The Unfriendly Takeover Vodafone – focus on providing mobile telephone services Mannesmann – aimed to become the European leader in integrated telecommunications

Main objectives Achieving a bigger scale that would stimulate cost reduction Achieving technological leadership Achieving a significant presence in continental Europe

The takeover - 1 Vodafone’s expansion focused exclusively on mobile communications Acquiring Mannesmann would give a quick access to the German telecommunication market and foster the fast growing strategy

The takeover - 2 Friendly start – Vodafone starts negotiating with Mannesmann Defensive Tactics – Mannesmann acquisition of Orange Vodafone’s response

The takeover - 3 The final bid 53.7 Vodafone shares for each Mannesmann share ( € each; total of 120 billion €)

Synergy effects Customer base from 28 million to 59 million Enhancement of logistics, marketing strategy, brand awareness and technological capacity and capabilities Product development, based on technological innovation became the watchword

Questions and Considerations ???