MGT.

5391 M&A: Mergers/Acquisitions

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Quiz #4
1. Why do approximately 85% of M&As fail? 2. Why are Ciscos acquisitions successful? 3. How many internal groups or teams does Cisco use in their acquisitions? 4. What are the names of these Cisco groups or teams? 5. What are Enterprise Teams? Where are they located at?
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A Firms Internal and External Growth External Market Strategies

and Other Forces Market/Customer Insights
Commercial Organizational

Corporate And Business Strategies

Value Chain: Core Competencies Identification

Increased Capabilities (Internal Growth)

Increased Performance

Outsourcing (NonCore Competencies) M&A/JVs (External Growth)

Team/Individuals
Technological

D:/Macy Class/MGT 5391/Spring _____ Source: Barry A. Macy, Successful Strategic Change, Berrett-Koehler Publishers, San Francisco, CA. (forthcoming)

2006/MandA

Mergers and Acquisitions: Three Types

Merger
A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage

Acquisition
A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses

Takeover
An acquisition where the target firm did not solicit the bid of the acquiring D:/Macy firmClass/MGT 5391/Spring 2006/MandA
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Remember: Approximately 85% Of all M&As are FAILURES!!

(Why?)
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Strategic Alliance Model: The Five Most Frequent Types of Alliances/M&A

Competitors
Key Suppliers

Firm
Supply Chain Demand Chain

Retail Store Or Large Preferred Customer Accounts

Consumers

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Question:In what world region M&As perform well?

North America Asia Europe

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Reasons for Acquisitions

Increased market power Overcome entry barriers

Problems in Achieving Success

Integration Difficulties/Cultures Inadequate evaluation of target

Cost of new product development Increased speed to market

Lower risk compared to developing new products Increased diversification Avoid excessive competition

Large or extraordinary debt

Acquisitions

Inability to achieve synergy

Too much diversification Managers overly focused on acquisitions

Too D:/Macy Class/MGT 5391/Spring 2006/MandA

large

Reasons for Acquisitions

Increased Market Power
Acquisition intended to reduce the competitive balance of the industry Example: British Petroleums acquisition of U.S. Amoco

Overcome Barriers to Entry

Acquisitions overcome costly barriers to entry which may make start-ups economically unattractive Example: Belgian-Dutch Fortis acquisition of American Bankers Insurance Group

Lower Cost and Risk of New Product Development

Buying established businesses reduces risk of start-up ventures D:/Macy Class/MGT 5391/Spring 2006/MandA 9 Example: Watson Pharmaceuticals acquisition of TheraTech

Reasons for Acquisitions

Increased Speed to Market
Closely related to Barriers to Entry, allows market entry in a more timely fashion Example: Kraft Foods acquisition of Boca Burger

Diversification
Quick way to move into businesses when firm currently lacks experience and depth in industry Example: CNETs acquisition of mySimon

Reshaping Competitive Scope

Firms may use acquisitions to restrict its dependence on a single or a few products or markets Example: General Electrics acquisition of NBC D:/Macy Class/MGT 5391/Spring 2006/MandA

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Problems with Acquisitions

Only a financial team assembled and they make the decision (should have two teams: one financial And one organizational where the organizational Team says Yes or No (i.e., Cisco & G.E.) Integration Difficulties
Differing financial and control systems can make integration of firms difficult Example: Intels acquisition of DECs semiconductor division

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Problems with Acquisitions

Inadequate Evaluation of Target
Winners Curse bid causes acquirer to overpay for firm Example: Marks and Spencers acquisition of Brooks Brothers

Large or Extraordinary Debt

Costly debt can create onerous burden on cash outflows Example: AgriBioTechs acquisition of dozens of small seed firms

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Problems with Acquisitions

Inability to Achieve Synergy
Justifying acquisitions can increase estimate of expected benefits Example: Quaker Oats and Snapple

Overly Diversified
Acquirer doesnt have expertise required to manage unrelated businesses Example: GE--prior to selling businesses and refocusing

Managers Overly Focused on Acquisitions

Managers may fail to objectively assess the value of outcomes achieved through the firms acquisition strategy Example: Ford and Jaguar

Too Large
Large bureaucracy reduces innovation and flexibility
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Attributes of Effective Acquisitions

+ 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 is 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
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Attributes of Effective Acquisitions

+ +

Low-to-Moderate Debt
Merged firm maintains financial flexibility

Flexibility
Has experience at managing change and is flexible and adaptable

Emphasize Innovation
Continue to invest in R&D as part of the firms overall strategy
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Case Example: Sabre and Get There

Sabre paid $758M

ONLY did an accounting/financial assessment No Org./Culture assessment

Outcome: It will take 10 years for them to payback Rule of thumb = 5 years pay back
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M&A Summary
Current Dilemma in Creating Profitable Growth
High Failure Rate of M&A
Tempting to focus on what is wrong with M&A and pass on acquisitions Approximately 85% of all M&As are failures

Organic (internal) growth is hard

Most companies have to grow externally to meet shareholder expectations.

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M&A Summary
Questions Managers Should Ask About M&A
What are the common denominators of companies that are successful at M&A? How do successful companies organize and approach M&A? Are these methods transferable to other firms?

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M&A Summary
Bain & Co. Study
724 publicly held U.S. firms Measured performance over 15 year period: 1968-2001 Compared firms behavior across 7,476 acquisitions to the excess return they provided to shareholders

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M&A Summary
Key Findings of Study
Bank on Experience
Frequent buyers outperform both non-buyers and infrequent buyers

Think Small
Shareholder returns are negatively correlated with deal size Small M&A deals are most successful

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M&A Summary
Key Findings contd
Dont assume home runs
Do not put all of your eggs in one basket by only doing a few big M&A deals

Buy in fair and foul weather

Develop a rigorous program of M&A and stick to it Constant buyers are most successful

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M&A Summary
Key Findings (contd)
Reinforce M&A commitment
Frequent buyers succeed because they are organized and have institutionalized disciplines

There is no magic in making M&A deal work

Firms that are successful at M&A make it an integral part of their strategies and support M&A just as they would any other core competency

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M&A Summary
How to Succeed at M&A
Get in the game, start small, ramp up
Frequent acquirers outperform other companies Firms that focus on small deals (less than 15% of buyer size) have the highest returns Combining deal frequency (high vs. low) with deal size (big vs. small) forms 5 strategic approaches to M&A

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M&A Summary
5 Approaches to M&A
Mountain Climbing
Frequent acquirers that start with small deals and ramp up to larger ones

Stringing Pearls
Frequent acquirers that focus on small targets

Betting Small
Infrequent acquirers that set their sights on small targets

Rolling the Dice

Infrequent acquirers that make a few big bets

Playing Dead
Firms that do not do M&A
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M&A Summary
5 Approaches to M&A (contd)
The worst strategy is Rolling the Dice
Most firms that make a few big bets, are infrequent acquirers with no M&A experience
Like putting a teenager behind the wheel of an 18wheelerlittle mistakes can be devastating Difficult to integrate with larger targets

The best strategy is Mountain Climbing

Frequent buyers work their way up from small to large firms and gain experience on the way

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M&A Summary
How to Succeed at M&A
Avoid Rookie Mistakes
Acquire companies that best fit your organizations strategy
Do not buy firms just because they are available or look cheap

Consult the frontline managers

These are the people who can best assess the quality of the target and will be responsible for the new firm

Develop a planned process for M&A

Helps avoid deal fever

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M&A Summary
How to Succeed at M&A (contd)
Use Dollar Cost Averaging
Constant Buyersbuy consistently through all economic cycles Recession Buyersincrease frequency of buying during recessions Growth Buyersbuy mainly during economic growth Doldrums Buyersbuy in stable periods between recession and growth
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M&A Summary
How to Succeed at M&A
The most successful strategy is the constant buyer
These firms buy high and they buy low Similar to the way dollar cost averaging is treated in mutual funds Always on the hunt for deals.

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M&A Summary
How to Succeed at M&A (contd)
Get on the Learning Curve
Start with small, low risk deals and build M&A capabilities Institutionalize M&A processes
This helps the firm to quickly recognize strategically fit deals, evaluate them, seal the contact, and integrate the acquired company

Create a feedback loop to learn from mistakes

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M&A Summary
How to Succeed at M&A
Build a Standing Deal Team
Maintain an experienced core M&A team
This team serves as a firms institutional memory bank as members learn lessons from each deal

Deal team members are in charge of the entire purchasefrom screening to due diligence Core deal team should stay involved in integration Company should do post-mortem after every M&A to update deal guidelines and learn from mistakes
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M&A Summary
Deal Teams at Clear Channel Communications
Clear channel has a central M&A team at its company headquarters
3 person team that imposes clear criteria for every purchase (Problem!)

Local M&A teams in each of its three major divisionsradio, outdoor displays, and entertainment
Work with line management to look for and evaluate deals Are in the best position to size up prospects and evaluate synergies according to central team criteria
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M&A Summary
How to Succeed at M&A (contd)
Pull in Line Management Early and Often
These are people that will be responsible for integrating and running the acquired business

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M&A Summary
Line Management Involvement at Washington Mutual
6 member core deal team picks and analyzes acquisition prospects Deal team seeks advice and help from business unit leaders who know operations best This collaboration helps ensure that the right decisions are made at the right price Kick starts integration
Early understanding and buy-in from business units
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M&A Summary
How to Succeed at M&A (contd)
Find Ways to Kill Deal Fever
Be prepared to walk away from a bad deal Insist on high-level management approval for all M&A Use a compensation system to ward off illconsidered acquisitions
e.g. Clear Channel ties its M&A teams pay to the contributions that acquisitions make to the firms financial performance

Set a walk-away price

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M&A Summary
CintasSuccessful Frequent Buyer
Cintas has supplemented its internal growth with the acquisition of hundreds of companies Over the last 5 years, the firm has spent $3 billion on more than 250 acquisitions, driving 40% of its topline growth Cintas is the market leader and revenues have risen over 20% per year to $2.3 billion in 2002
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M&A Summary
CintasSuccessful Frequent Buyer
Cintas CEO Robert Kohlepp states: Success depends on three things: top and line management involvement, institutionalizing the process of making acquisitions, and being willing to pass up a bad deal.

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M&A Summary
Problems with Acquisitions
Only a financial team assembled and they make the decision
Should have two teams
One financial and one organizationalwhere the organizational team says Yes or No

A firm should maintain a core M&A team to deal with all aspects of a purchase

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M&A Summary
Problems with Acquisitions
Integration Difficulties
Differing financial and control systems can make integration of firms difficult Deal Smarts authors recommend involving line management at an early stage to help with integration Also discuss the need for an integration team to help make the transition smooth
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M&A Summary
Problems with Acquisitions (contd)
Inadequate Evaluation of Target
Winners Curse bid causes acquirer to overpay for firm Article recommends developing a structured process for M&A and maintaining an experienced deal team in order to avoid deal fever

Managers Overly Focused on Acquisitions

Managers may fail to objectively assess the value of outcomes achieved through the firms acquisition strategy This can be overcome by requiring high-level management approval for M&A and by tying compensation systems to acquisition performance
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M&A Summary
Problems with Acquisitions
Too Large
Large bureaucracy reduces innovation and flexibility The best strategy is mountain climbing
Start with small deals and move up to big ones

The larger the target, the more difficult it will be to integrate

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