1. MKT 450 Strategic Management Mishari Alnahedh

2. LECTURE 10: GROWTH STRATEGIES

3. 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.

4. 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

5. 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.

6. 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

7. Mergers and Acquisitions
Mishari Alnahedh

8. 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 , 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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.

17. 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

18. 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

19. 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

20. Final Exam Review Session
NEXT CLASS !
Mishari Alnahedh
Final Exam Review Session
Details TBA in class