1. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 9 Corporate Strategy: Mergers and Acquisitions, Strategic Alliances

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3. 9-3 Chapter Outline 9.1 Mergers and Acquisitions Merging with Competitors Why Do Firms Make Acquisitions? M&A and Competitive Advantage 9.2 Strategic Alliances Why Do Firms Enter Strategic Alliances? Governing Strategic Alliances Alliance Management Capability 9.3 Implications for the Strategist 9.1 Mergers and Acquisitions Merging with Competitors Why Do Firms Make Acquisitions? M&A and Competitive Advantage 9.2 Strategic Alliances Why Do Firms Enter Strategic Alliances? Governing Strategic Alliances Alliance Management Capability 9.3 Implications for the Strategist

4. 9-4 ChapterCase 9 How Buzz Lightyear, Iron Man, and Darth Vader Joined Mickey’s Family  Disney earns over $45 billion in revenues − major purchases: 2006 – acquired Pixar for $7.4 billion After Eisner left Disney in the fall of 2005 2009 – acquired Marvel Entertainment for $4 billion 2012 – acquired Lucasfilm for over $4 billion  Disney uses alliances and acquisitions for complementary assets. Related-linked diversification (see Ch. 8) How Buzz Lightyear, Iron Man, and Darth Vader Joined Mickey’s Family  Disney earns over $45 billion in revenues − major purchases: 2006 – acquired Pixar for $7.4 billion After Eisner left Disney in the fall of 2005 2009 – acquired Marvel Entertainment for $4 billion 2012 – acquired Lucasfilm for over $4 billion  Disney uses alliances and acquisitions for complementary assets. Related-linked diversification (see Ch. 8) ©Disney, Todd Anderson/AP Images

5. 9-5  Merger: combining two companies usually similar in size Friendly approach Ex: Ernst & Young  Acquisition: purchase or takeover of a company Can be friendly Ex: Disney buys Pixar Hostile takeover Ex: Vodafone buys Mannesmann 9.1 Mergers and Acquisitions

6. 9-6  Horizontal integration: process of merging and acquiring competitors HP buys Compaq in 2002. Pfizer buys Wyeth in 2009. Live Nation buys Ticketmaster in 2010.  Benefits: Reduce competitive intensity Lower costs Increased differentiation Access to new markets and distribution channels Merging with Competitors

7. 9-7 Strategy Highlight 9.1 Food Fight: Kraft’s Hostile Takeover of Cadbury  Kraft acquired Cadbury in UK. Hostile takeover, $20 billion deal Cadbury has strong position in emerging economies. Perfected distribution system in countries like India Kraft faces strong rivalries worldwide, including China.  2012 − Kraft restructured  With Hershey’s attention on China (2013 entry), Kraft has an opportunity for gaining U.S. market share. Food Fight: Kraft’s Hostile Takeover of Cadbury  Kraft acquired Cadbury in UK. Hostile takeover, $20 billion deal Cadbury has strong position in emerging economies. Perfected distribution system in countries like India Kraft faces strong rivalries worldwide, including China.  2012 − Kraft restructured  With Hershey’s attention on China (2013 entry), Kraft has an opportunity for gaining U.S. market share.

8. 9-8  Many M&As actually destroy shareholder value! When there is value, it often goes to the acquiree. Acquirers tend to pay a premium.  Why still desire M&As? Principal–agent problems Overcome competitive disadvantage Superior acquisition and integration capability M&A and Competitive Advantage

9. 9-9 9.2 Strategic Alliances

10. 9-10  Strengthen competitive position Apple vs. Amazon  Enter new markets Local partner for global growth Microsoft partners with Yahoo on search  Hedge against uncertainty Real options approach Roche invests in Genentech 1990 & buys it in 2009  Access critical complementary assets Pixar partners with Disney  Learn new capabilities GM & Toyota (NUMMI) – formed in 1984 Who won the learning race? Probably Toyota…. Why Do Firms Enter Strategic Alliances?

11. 9-11 Strategy Highlight 9.2 Strategic Alliances to Challenge Amazon  Amazon’s Kindle Content providers do not want fixed price for e-books. ($9.99) Below cost is the same strategy Amazon started for printed books.  Apple’s iPad Let publishers set the prices directly (Agency model) Worked with publishers to increase bargaining power  Challenge Amazon’s early lead in the delivery of e-content Amazon share dropped from 90 to 60% in e-books.  2013 – a federal judge ruled that Apple colluded with publishers to drive up prices of e-books Strategic Alliances to Challenge Amazon  Amazon’s Kindle Content providers do not want fixed price for e-books. ($9.99) Below cost is the same strategy Amazon started for printed books.  Apple’s iPad Let publishers set the prices directly (Agency model) Worked with publishers to increase bargaining power  Challenge Amazon’s early lead in the delivery of e-content Amazon share dropped from 90 to 60% in e-books.  2013 – a federal judge ruled that Apple colluded with publishers to drive up prices of e-books

12. 9-12 Exhibit 9.2 Key Characteristics of Different Alliance Types

13. 9-13  Most common forms of alliance Supply agreements Distribution agreements Licensing agreements  Vertical strategic alliances  Firms share explicit knowledge Knowledge that can be codified Patents User manuals and fact sheets, Scientific publications NON-EQUITY ALLIANCES

14. 9-14  At least one partner takes partial ownership position Stronger commitment toward the relationship  Allow the sharing of tacit knowledge Tacit knowledge concerns the “know-how”  Partial ownership, thus equity alliances signal stronger commitments  Moreover, equity alliances allow for the sharing of tacit knowledge that can not be codified. Toyota has an equity alliance with Tesla. EQUITY ALLIANCES

15. 9-15  Joint ventures (JVs) are the strong ties, trust, and commitment that can result.  Created and owned by two or more companies Hulu owned by NBC, ABC, and Fox  Long-term commitment Exchange both tacit and explicit knowledge Frequent interaction of personnel  Used to enter foreign markets  Least common of the 3 types of alliances JOINT VENTURES

16. 9-16  A firm’s ability to effectively manage three alliance- related tasks concurrently 30 to 70% of all alliances yield disappointing results 1.Partner selection and alliance formation 2.Alliance design and governance 3.Post-formation alliance management Alliance Management Capability

17. 9-17  The expected alliance benefits must exceed its costs.  One or more of the five alliance formation reasons should be present: 1.Strengthen competitive position 2.Enter new markets 3.Hedge against uncertainty 4.Access critical complementary resources 5.Learn new capabilities  Partner compatibility and commitment are necessary conditions for a successful alliance. PARTNER SELECTION AND ALLIANCE FORMATION

18. 9-18 9.3 Implications for the Strategist  A strategist has three options to drive firm growth: Organic growth through internal development External growth through alliances External growth through acquisition  The build-borrow-or-buy framework: Aids strategists in deciding whether to pursue internal development (build) Enter a contract arrangement or strategic alliance (borrow) Acquire new resources, capabilities, and competencies (buy)

19. 9-19 Exhibit 9.5 How to Implement a Corporate Strategy: The Build-Borrow-or-Buy Framework

20. 9-20 ChapterCase 9 ©Disney, Todd Anderson/AP Images Consider This… CEO Bob Iger’s acquisition-led growth strategy Disney has become increasingly diversified Business revenue streams are more predictable. Box office, home entertainment, theme parks, cable TV, toys, licensing, etc. Media industry is being disrupted: People spend less time watching movies in theaters. More time-consuming content is available online. Consider This… CEO Bob Iger’s acquisition-led growth strategy Disney has become increasingly diversified Business revenue streams are more predictable. Box office, home entertainment, theme parks, cable TV, toys, licensing, etc. Media industry is being disrupted: People spend less time watching movies in theaters. More time-consuming content is available online.

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