2. Acquisitions
B290

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

4. 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”

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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 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, 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

11. 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?

12. 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