1. Chapter 10 Studying Mergers and Acquisitions

2. OBJECTIVES Explain the motivations behind acquisitions 1
Explain why mergers and acquisitions are important vehicles of corporate strategy 2
Identify the various types of acquisitions 3
Outline the alternative ways to integrate acquisition and explain the implementation process 4

3. + + MERGER vs. ACQUISITION A B C
The consolidation or combination of one firm with another
Merger + A B A
The purchase of one firm by another so that ownership transfers
Acquisition +
The “merger” of Daimler with Chrysler in 1997 is considered by many to have been an acquisition in disguise

4. MOTIVES FOR MERGERS AND ACQUISITIONS
Managerial self-interest
Hubris
Synergy
Sometimes termed “managerialism”
Managers can conceivably make acquisitions – and even willingly overpay for them – to maximize their own interests at the expense of shareholder wealth
Managers can make mistaken valuations
Managers may have unwarranted confidence in their valuations and their ability to create value due to pride, over-confidence, or arrogance
Managers may believe that the value of the firms combined can be greater than the sum of the two independently
Reduced threats
Increased market power and access
Realized cost savings
Increased financial strength
Sharing and leveraging capabilities

5. M&A – A VEHICLE THAT IMPACTS ALL ELEMENTS OF THE STRATEGY DIAMOND
M&A and the Strategy Diamond While mergers and acquisitions are explicitly vehicles of strategy, they have major implications for arenas, staging, and economic logic as well
Economic logic
Arenas
Vehicles
Staging
Differentiators

6. US ACQUISITION ACTIVITY
Value of transactions, US$, 2003
Number of transactions
Value of transactions ($, 2003)
No. of transactions

7. UPs AND DOWNs AT SNAPPLE1`
In 1972, Leonard Marsh, Hyman Golden, and Arnold Greenberg founded a business called the Unadulterated Food Corporation and began selling juice in Queens, NY. The name Snapple was coined while trying to develop an apple soda.
In 1987, Snapple introduced iced teas with fun names and flavors and enlisted controversial radio personalities Howard Stern and Rush Limbaugh to promote them.
Cadbury Schweppes buys Snapple from Triarc for $1.45 billion. Snapple is now part of Cadbury’s very successful America’s Beverage division, which includes 7Up, Dr. Pepper, Mystic, and Mott’s juices, among other brands.
After great success, Snapple is sold to Quaker for $1.8 billion
1972
1994
1997
2000
Less than three years later, Quaker throws in the towel and sells Snapple for $300 million to Triarc

8. BENEFITS AND DRAWBACK OF ACQUISITION OVER INTERNAL DEVELOPMENT
More expensive, all at once
Inherit adjunct businesses to run or divest
One-time, all-or-nothing decision
Potential for organizational conflict +
Speed
Critical mass
Access to complementary assets
Reduced competition

9. CLASSIFICATION OF ACQUISITIONS
Product/ Market Extension
Overcapacity M&A
Industry Convergence
Roll-up M&A
M&A as R&D
Example
DaimlerChrysler merger
Service Corporation International’s more than 100 acquisitions of funeral homes
Pepsi’s acquisition of Gatorade
Intel’s acquisitions of dozens of small, high tech companies
AOL’s acquisition of Time-Warner
Objectives
Eliminating capacity, gaining market share, and increasing efficiency
Efficiency of larger operations (e.g., economies of scale, superior management)
Synergy of similar but expanded product lines or geographic markets
Shortcut to innovation by buying it from small companies
Anticipation of new industry emerging; culling resources from firms in multiple industries whose boundaries are eroding
Percent of all M&A deals
37% 9%
36% 1% 4%
Source: J.L.Bower, “ Not All M&As Are Alike – and That Matters,” Harvard Business Review 79: 3 (2001),

10. THE ACQUISITION PROCESS
A process perspective
Results
Acquisition integration
Justification due diligence, negotiation
Idea
Decision-making process problems
Integration process problems

11. ACQUISITION SCREENING
“Soft-fit” acquisition screening by Cisco Systems
Screening criteria
Means of achieving criteria
Offer both short- and long-term win-wins for Cisco and acquired company
Have complementary technology that fills a need in Cisco’s core product space
Have a technology that can be delivered through Cisco’s existing distribution channels
Have a technology and products that can be supported by Cisco's support organization
Able to leverage Cisco’s existing infrastructure and resource base to increase its overall value
Share a common vision and chemistry with Cisco
Have a similar understanding and vision of the market
Have a similar culture
Have a similar risk-taking style
Be located (preferably) in Silicon Valley or near one of Cisco’s remote sites
Have a company headquarters and most manufacturing facilities close to one of Cisco's main sites

12. HOLDING Need for strategic interdependence Low High High Preservation
Symbiosis
Need for organizational autonomy
Low
Holding
Absorption
The acquiring company allows little autonomy - yet does not integrate the target into its businesses, often imposing its own, extensive accounting and control systems (e.g., Bank One’s acquisitions of local banks )

13. ABSORPTION Need for strategic interdependence Low High High
Preservation
Symbiosis
Need for organizational autonomy
Low
Holding
Absorption
Acquiring company completely absorbs the target company. If the target company is large, this can take time.

14. PRESERVATION Need for strategic interdependence Low High High
Symbiosis
Need for organizational autonomy
Low
Holding
Absorption
The acquiring company makes very few changes to the target, and instead learns from it in preparation for future growth (e.g., many of Wal-Mart’s early international acquisitions)

15. SYMBIOSIS Need for strategic interdependence Low High High
Preservation
Symbiosis
Need for organizational autonomy
Low
Holding
Absorption
The acquiring company integrates the target in order to achieve synergies - but allows for autonomy, for example to retain and motivate employees. This is possibly the most difficult to implement (e.g., Cisco's acquisitions which cost the firm $1 million per employee on average).

16. KEY LESSONS FOR IMPLEMENTING M&As
It’s a continuing process, not an event
Start the integration process long before the deal is closed.
Integration management is a full-time job
Many successful acquirers appoint an “integration manager” because integration is too much work for acting managers to add to their workloads.
Key decisions should be made swiftly
Speed is of the essence because of the cost, distraction, and time value
of money.
Integration should address technical and cultural issues
Managers often focus on technical issues only. This is a mistake.

17. SUMMARY
Explain the motivations behind acquisitions and show how they’ve changed over time 1
Explain why mergers and acquisitions are important vehicles of corporate strategy 2
Identify the various types of acquisitions 3
Outline the alternative ways to integrate acquisition and explain the implementation process 4