1. Knowledge Objectives
Build on our understanding of related/unrelated diversification
Understand the rationales, risks and rewards of acquisitions
Understand strategic alliance types, rationales, and governance
Vertical and horizontal alliances
Skill sharing, cost sharing, market entry

2. Mergers and Acquisitions (some terminology)
Merger: a strategy through which two firms agree to integrate their operations on a relatively co-equal basis
Acquisition: a strategy through which one firm buys a controlling interest in another firm with the intent of making the acquired firm a subsidiary business within its own portfolio
Takeover: a special type of an acquisition strategy wherein the target firm did not solicit the acquiring firm’s bid

3. Rationales for Acquisitions & Mergers?
Industry Lifecycle
(e.g., Whirlpool, Maytag)
Technological Trajectories (e.g., Google, YouTube)

4. Some notable acquisitions
AOL acquired Time Warner for $164B (2003)
eBay acquired Skype for $2.6B (2005)
Newscorp acquired MySpace.com for $580M (2005)

5. Siemens AG (NYSE:SI) announced Tuesday it will acquire a 28% stake in Archimede Solar Energy S.p.A. Siemens indicated it may seek a majority stake in the Italian company. The deal expands the German industrial giant's presence in the solar power sector, where is the market leader in steam turbine generators for solar thermal power plants.
ASE's technology made it an attractive target. The company is the sole producer of solar receivers that use molten salt rather than oil as the heat transfer fluid. Siemens says it can create more efficient solar thermal power plants by combining that technology with its own, positioning for what it believes will be heated demand for solar power over the next decade
Source: Deal.com 3/25/09

6. Acquisitions Google bought YouTube ($1.65B in 2006) Why?
Google bought a rival.
YouTube had four times as many hits as Google Video
YouTube streamed nine times as many clips as Google Video.
Google’s choice to buy rather than build marked a big strategic change.
(Economist, 10/14/06, p82).

7. Google Acquires YouTube ??
1st – what industry is Google in?
2nd – what is the Google “system”
3rd – logic of the acquisition?
YouTube=45% of video users

8. Acquisitions Acquisitions = alternatives …
to internal development of resources and capabilities
PROBLEM: there is “no market” to price resources and capabilities – value depends on combination of acquirer and target; difficult to evaluate in advance (Barney, 1986).
Acquirers pay large premiums over the eventual value of the targeted capabilities – though shareholders of targeted firms gain
Acquiring firms fail to achieve strategic and financial objectives in a majority of cases.
Difficulties in integrating distinct organizations and cultures frequently result in the destruction of the targeted capabilities (Madhok, 1997).

9. Reasons for Making Acquisitions
Learn and develop
new capabilities
Increase
market power
Reshape firm’s
competitive scope
Acquisitions
Overcome
entry barriers
Increase
diversification
Cost of new
product development
Lower risk compared
to developing new
products
Increase speed
to market

10. Google Industry

11. Reasons for Making Acquisitions:
Increase Market Power
Factors increasing market power
Enables firm to sell goods or services above competitive levels of value;
Lowers costs of primary or support activities below those of its competitors
derived from how the size of the firm augments resources and capabilities
Market power is increased by
horizontal acquisitions
vertical acquisitions
related acquisitions

12. Reasons for Making Acquisitions:
Overcome Entry Barriers
Barriers include
economies of scale (established competitors)
differentiated products
LT customer relationships that create product loyalties with competitors
acquisition of an established company
Can be more effective than entering the market de novo, i.e., offering an unfamiliar good or service
provides a new entrant with immediate market access

13. Reasons for Making Acquisitions:
Product Cost & Speed to Market
Significant investments of a firm’s resources are required to
Develop new products internally
introduce new products into the marketplace
Acquisition of a competitor may result in
more predictable returns (near term)
faster market entry
rapid access to new capabilities

14. Reasons for Making Acquisitions:
Accelerate product development
Acquisitions to improve ST product portfolios are more easily valued, vs. those of LT product development
Managers may view acquisitions as lowering risk in this area – why?

15. Reasons for Making Acquisitions:
Diversification
easier to develop and introduce new products in the firm’s current markets (shared resources)
Lack of market/product knowledge makes “organic” development difficult
uncommon for many firms to use internal development for new products to diversify in high tech.
acquisitions are quick and easy way to diversify a firm and change its product/market portfolio

16. Reasons for Making Acquisitions:
Competitive Scope
use acquisitions to reduce dependence on one or more products or markets (become a “generalist firm”)
i.e., reducing a company’s dependence on specific markets alters the firm’s competitive scope

17. Reasons for Making Acquisitions:
Exploration
Acquisitions may enable a firm to learn – to gain capabilities currently unavailable to the firm
Acquisitions may be used to
acquire a special technological capability
broaden a firm’s knowledge base
Overcome knowledge-based inertia (i.e., local search)

18. Problems With Acquisitions
Integration
difficulties
Resulting firm
is too large
Acquisitions
Inadequate
evaluation of target
Target firms preoccupied
with acquisitions
Large or
extraordinary debt
Overdiversification
Inability to
achieve synergy

19. Problems With Acquisitions
Integration Difficulties
melding disparate corporate cultures
linking different financial and control systems
building effective relationships (when management styles differ)
resolving status of acquired firm’s executives
losing key personnel weakens firm’s capabilities and reduces value of acquisition

20. Problems With Acquisitions
Inadequate Target Evaluation
Due diligence requires hundreds of issues be closely examined, including
financing the intended transaction
Cultural differences between acquirer and target
tax consequences
Organizational and incentive actions necessary to integrate human resources
Ineffective due-diligence
Results in excessive premiums for the target company

21. Problems With Acquisitions
Large Debt
Firm may take on significant debt to acquire a company (LBO)
High debt
increases likelihood of bankruptcy
downgrades the firm’s credit rating
Creates opportunity costs - precludes investment in activities that contribute to value creation

22. Problems With Acquisitions
Inability to Achieve Synergy
Synergy exists when assets are worth more when used in conjunction with each other than when they are used separately
transaction costs (i.e., aligning incentive systems) attend acquisition strategies
Firms underestimate indirect costs when evaluating a potential acquisition

23. Problems With Acquisitions
Overdiversification
Increased diversification requires more complex structures to interpret & integrate information
Increased scope created can cause reliance on financial rather than strategic controls to evaluate BU performance and potential
Acquisitions may become substitutes for innovation (good or bad?)

24. Problems With Acquisitions
Acquisition Uncertainties
Target firms may slow down or operate in “suspended animation” during an acquisition
Executives may hesitate to make decisions with long-term consequences until negotiations have been completed
Acquisition process can create a short-term perspective and a greater aversion to risk among top-level executives in a target firm

25. Problems With Acquisitions
Too Large
Additional bureaucratic costs can exceed the benefits of the economies of scale and additional market power
Integrating larger targets = more bureaucratic controls
controls can lead to rigid behavior / reduced adaptation, sacrificing innovation and responsiveness

26. Attributes of Effective Acquisitions
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

27. Attributes of Effective Acquisitions
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

28. Technology Trajectory as an S-Curve (Foster, 1986)
Slow initial innovation rate
Accelerates until it reaches diminishing returns

30. Technical Standards for Personal Computers

31. TECHNOLOGICAL CHANGE AND INDUSTRY STRUCTURE:
INTEGRAL PRODUCT
VERTICAL INDUSTRY
MODULAR PRODUCT
HORIZONTAL INDUSTRY
NICHE
COMPETITORS
TECHNICAL ADVANCES
HIGH-
DIMENSIONAL
COMPLEXITY
SUPPLIER
MARKET POWER
PRESSURE TO
DIS-INTEGRATE
PRESSURE TO
INTEGRATE
ORGANIZATIONAL
RIGIDITIES
PROPRIETARY SYSTEM
PROFITABILITY
Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”

32. Double helix view: communications industry (MIT CFP program)

33. Modularity, innovation, and Organizational Effects
Redesign
Automobile cruise control
Hybrid Autos
Components
Electric seats
FWD vs. RWD vs. All WD
Refine
Stable
Changed
Component links
Adapted from Henderson & Clark, 1990

34. Alternative to Acquisitions: Cooperative Strategy
Cooperative strategy is a strategy in which firms
work together
to achieve a shared objective
Cooperating with other firms is a strategy that
creates value for a customer
exceeds the cost of constructing customer value in other ways
establishes a favorable position relative to competition

35. Strategic Alliance A strategic alliance involves
A strategic alliance is a cooperative strategy in which
firms combine some of their resources and capabilities to create a competitive advantage
A strategic alliance involves
exchange and sharing of resources and capabilities
co-development or distribution of goods or services
Independent firms

36. Strategic Alliance Firm A Firm B Resources Capabilities
Core Competencies
Resources
Capabilities
Core Competencies
Combined
Resources
Capabilities
Core Competencies
Mutual interests in designing, manufacturing,
or distributing goods or services

37. Types of Cooperative Strategies
Joint venture: two or more firms create an independent company by combining parts of their assets
Equity strategic alliance: partners who own different percentages of equity in a new venture
Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing

38. Business-Level Cooperative Strategies:
Complementary
Alliances
complementary strategic alliances are designed to take advantage of market opportunities by combining partner firms’ assets in complementary ways to create new value
these include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage

39. Business-Level Cooperative Strategies:
Buyer
Margin
Primary Activities
Support Activities
Service
Marketing & Sales
Outbound Logistics
Operations
Inbound Logistics
Firm Infrastructure
Human Resource Mgmt.
Technological Development
Procurement
vertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firms
outsourcing is one example of this type of alliance
Supplier
Vertical Alliance
Margin
Primary Activities
Support Activities
Service
Marketing & Sales
Outbound Logistics
Operations
Inbound Logistics
Firm Infrastructure
Human Resource Mgmt.
Technological Development
Procurement

40. Business-Level Cooperative Strategies:
Buyer
Buyer
Horizontal Alliance
Margin
Primary Activities
Support Activities
Service
Marketing & Sales
Outbound Logistics
Operations
Inbound Logistics
Firm Infrastructure
Human Resource Mgmt.
Technological Development
Procurement
Potential Competitors
Margin
Primary Activities
Support Activities
Service
Marketing & Sales
Outbound Logistics
Operations
Inbound Logistics
Firm Infrastructure
Human Resource Mgmt.
Technological Development
Procurement
horizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chain
focus on long-term product development and distribution opportunities
the partners may become competitors
requires a great deal of trust between the partners

41. Business-Level Cooperative Strategies:
Complementary
Alliances
competition response strategic alliances occur when firms join forces to respond to a strategic action of another competitor
because they can be difficult to reverse and expensive to operate, competition response strategic alliances are primarily formed to respond to strategic rather than tactical actions
Competition
Response Alliances

42. Business-Level Cooperative Strategies:
Complementary
Alliances
uncertainty reducing strategic alliances are used to hedge against risk and uncertainty
these alliances are most noticed in fast-cycle markets
alliance may be formed to reduce the uncertainty associated with developing new product or technology standards (i.e., share the risk of uncertain R&D investments)
Competition
Response Alliances
Uncertainty
Reducing Alliances

43. Business-Level Cooperative Strategies:
Complementary
Alliances
competition reducing strategic alliances may be created to avoid destructive or excessive competition
explicit collusion exists when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal)
tacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each other’s competitive actions and responses
Competition
Response Alliances
Uncertainty
Reducing Alliances
Competition Reducing
Alliances

44. Business-Level Cooperative Strategies:
Complementary
Alliances
mutual forbearance is a form of tacit collusion in which firms avoid competitive attacks against those rivals they meet in multiple markets
competition reducing strategic alliances may require governments to find ways to permit collaboration among rivals without violating antitrust laws
Competition
Response Alliances
Uncertainty
Reducing Alliances
Competition Reducing
Alliances

45. Corporate-Level Cooperative Strategies
Corporate-level cooperative strategies are designed to facilitate product and/or market diversification
diversifying strategic alliance
synergistic strategic alliance
franchising
Diversifying alliances and synergistic alliances allow firms
to grow and diversify their operations
through a means other than a merger or acquisition

46. Corporate-Level Cooperative Strategies:
Diversifying
Alliances
diversifying strategic alliance allows a firm to expand into new product or market areas without completing a merger or an acquisition
provides some of the potential synergistic benefits of a merger or acquisition, but with less risk and greater levels of flexibility
permits a “test” of whether a future merger between the partners would benefit both parties

47. Corporate-Level Cooperative Strategies:
Synergistic Alliances
Diversifying
Alliances
synergistic strategic alliances create joint economies of scope between two or more firms
create synergy across multiple functions or multiple businesses between partner firms
Synergistic
Alliances

48. International Cooperative Strategies
Cross-border strategic alliance
an international cooperative strategy in which firms with headquarters in different nations combine some of their resources and capabilities to create a competitive advantage
a firm may form cross-border strategic alliances to leverage core competencies that are the foundation of its domestic success to expand into international markets

49. Network Cooperative Strategies:
Stable Alliance Network
long term relationships that often appear in mature industries where demand is relatively constant and predictable
stable networks are built for exploitation of the economies available between firms
Stable Alliance
Network

50. Technological/market similarity and alliance governance

51. Competitive Risks with Cooperative Strategies
Partner may act opportunistically
Misrepresentation of competencies brought to the partnership
Partner fails to make committed resources and capabilities available to its partners
Firm may make investments that are specific to the alliance while its partner does not

52. Approaches for Managing Cooperative Strategies
cost minimization
formal contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled
opportunity maximization
maximize partnership’s value-creation opportunities
partners take advantage of unexpected opportunities to learn from each other and to explore additional marketplace possibilities
fewer formal, limiting, contracts