You are on page 1of 35

Contents

Chapter-01: Introduction .............................................................................................................................. 2


1.1 Origin of the Study .............................................................................................................................. 2
1.2 Background of the Study ..................................................................................................................... 2
1.3 Importance of the Study ..................................................................................................................... 3
1.4 Objective of the Study......................................................................................................................... 3
1.5 Scope of study ..................................................................................................................................... 3
1.6 Methodology of Collecting Data ......................................................................................................... 4
1.7 Limitation of the Study........................................................................................................................ 4
Chapter-02: Literature Review ...................................................................................................................... 5
2.1 Merger and Acquisition....................................................................................................................... 5
2.2 Strategic Importance of Acquisition ................................................................................................... 6
Chapter-03: Case development and analyses............................................................................................... 7
3.1 Case-01: Pfizer Taking over Hospira.................................................................................................... 7
3.1.1 Company Overview ...................................................................................................................... 9
3.1.2 SWOT Analysis of the Companies .............................................................................................. 10
3.1.3 Building Blocks of Competitive Advantage ................................................................................ 11
3.1.4 Porters Five Forces Model of the Industry................................................................................. 14
3.1.5 Strategic Motives for Acquisition ............................................................................................... 16
3.1.6 Comparison between Pre and Post Merger Situation ............................................................... 17
3.1.7 Impact of the Acquisition in the Sustainable Competitive Advantage ...................................... 18
3.2 Case-01: Facebook Inc. (FB) and WhatsApp ..................................................................................... 19
3.2.1 Company Overview .................................................................................................................... 21
3.2.2 SWOT Analysis of the Companies .............................................................................................. 22
3.2.3 Building Blocks of Competitive Advantage ................................................................................ 24
3.2.4 Porters Five Forces Model of the Industry................................................................................. 25
3.2.5 Strategic Motives for Acquisition ............................................................................................... 28
3.2.6 Comparison between Pre and Post Merger Situation ............................................................... 28
3.2.7 Impact of the Acquisition in the Sustainable Competitive Advantage ...................................... 30
Chapter-04: Comparison between the Two Cases ..................................................................................... 31
Findings & Analysis ..................................................................................................................................... 32
Recommendation........................................................................................................................................ 33
Conclusion ................................................................................................................................................... 33
References .................................................................................................................................................. 34
Appendix ........................................................................................................ Error! Bookmark not defined.

Chapter-01: Introduction
Mergers and acquisitions are transactions in which the ownership of companies or their operating
units are transferred or combined. As an aspect of strategic management, M & A can allow
enterprises to grow, shrink, change the nature of their business or improve their competitive
position.
From a legal point of view, a merger is a legal consolidation of two entities into one entity,
whereas an acquisition occurs when one entity takes ownership of another entity's stock, equity
interests or assets. From a commercial and economic point of view, both types of transactions
generally result in the consolidation of assets and liabilities under one entity, and the distinction
between a "merger" and an "acquisition" is less clear. A transaction legally structured as a
merger may have the effect of placing one party's business under the indirect ownership of the
other party's shareholders, while a transaction legally structured as an acquisition may give each
party's shareholders partial ownership and control of the combined enterprise

1.1 Origin of the Study


The B.B.A. Program under the Department of International Business offers a course named
Strategic Management (Course Code- 401) which requires submitting a Report on a specific
topic determined by the course instructor. The Report is under the headline of Case
Development and Analysis on Global Merger and Acquisition.

1.2 Background of the Study


As the students of international business, we realize that global merger and acquisition has
become an important issue for the companies. Giant firms are continuously acquiring their small
rivals to enjoy monopoly and greater profitability. Merger and acquisition can be seen in every
industry. Sometimes company merges or acquires in order to operate their business efficiently,
attaining economic of scale, bring new technological revolution and so on. Sometimes
companies merge or acquire to achieve the maximum market share and also attain superior
market growth.

1.3 Importance of the Study


The study deals with two major acquisitions that have been taken place in 2014 and 2015. One
acquisition has taken place between Pfizer and Hospira pharmaceuticals Ltd. Another acquisition
has taken place between Facebook and WhatsApp. Both of the incidents have significant impact
in their respective industry. Social media companies are now the worlds most largest and
profitable firms. They have just changed the view of the overall industry by moving it towards a
digital world. On the other hand, the pharmaceutical industry is the heart of the Healthcare
industry of the world. So the study pertain huge value to the respective stakeholders.

1.4 Objective of the Study


The Primary objective of the report is to fulfill the partial requirement of the course.
The Secondary objectives of this report are To understand the merger and acquisition
To know the process of merger and acquisition.
Develop and Analyze Case on Acquisitions
To know the internal and external benefits and opportunity about merger and acquisition.
To compare the companys overall performance after merge or acquire.
To analyze strategically between two global acquisitions

1.5 Scope of study


Everything has some advantage which helps that work to be completed thoroughly. We get some
scope which helps us to make a standard Report. Major of them areEnough Time: We have got enough time to prepare a Report so that we could gather
information with much tension free mind.
Easy Access to Internet: We have a very smooth access to internet in our computer lab.
Consequence of which is we didnt face any kind of trouble in this sector.
Easy Topic: The topic of us was much easier than that of others. So we didnt feel any problem
about our topic.
Proper instruction: Our course teacher gives us proper and clear instruction before assigning
this report on us.

1.6 Methodology of Collecting Data


This report has been prepared on the basis of experience gathered during the period of semester.
For preparing this report, we have also got information from website and related books. We have
presented our experience and findings by using different chart and tables. Relevant data for this
report has been collected directly investigation of different records, papers, documents, and
operational process. We have reviewed five renowned articles to make our literature review. The
report is basically written based on Secondary data. Most of the information has been derived
from Company Website and Annual report. Its a descriptive report. The case studies are
prepared on hypothetical data. The cases are analyzed with various parameters and strategic
tools. The Finding and Analysis are the result of our Analysis.

1.7 Limitation of the Study


No extensive research is conducted for preparing the report. The report is totally based on the
Secondary data, theory and conceptions from many books, journals and internet. So the result
may vary with reality due to the constraints or limitation of the data and the sources.

Chapter-02: Literature Review


2.1 Merger and Acquisition
The term "acquisition" refers to the acquisition of assets by one company from another company.
In an acquisition, both companies may continue to exist. However, throughout this course we
will loosely refer to mergers and acquisitions as a business transaction where one company
acquires another company (Birru & Justin, 2009). The acquiring company will remain in
business and the acquired company will be integrated into the acquiring company and thus, the
acquired company ceases to exist after the merger.
There are three types of mergers are widely seen in the industry,
1. Horizontal
2. Vertical
3. Conglomerate
1. Horizontal: Two firms are merged across similar products or services. Horizontal mergers are
often used as a way for a company to increase its market share by merging with a competing
company (Mark & Lehn, 1990).
2. Vertical: Two firms are merged along the value-chain, such as a manufacturer merging with a
supplier. Vertical mergers are often used as a way to gain a competitive advantage within the
marketplace.
3. Conglomerate: Two firms in completely different industries merge, such as a gas pipeline
Company merging with a high technology company. Conglomerates are usually used as a Way
to smooth out wide fluctuations in earnings and provide more consistency in long-term Growth.
Companies buy the smaller ones or merge with the competitors to beat the market leader for the
following reasons,
1. Revenues: By combining the two companies, we will realize higher revenues then if the
two companies operate separately.
2. Expenses: By combining the two companies, we will realize lower expenses then if the
two companies operate separately.
3. Cost of Capital: By combining the two companies, we will experience a lower overall
cost of capital

2.2 Strategic Importance of Acquisition


Mergers and acquisitions are a key part of a corporate growth strategy. However, during tough
economic times, many companies are reluctant to pursue other entities. Yet this is the time when
the best investments are made. Just like individual investors tend to buy stocks when they are
high, many acquisitions occur during boom economic times when a company is likely
overvalued. The Connell Curtis Groups business growth consulting can help your company
weigh the benefits of a merger or an acquisition with the goal of meeting your strategic
objectives (Michael and Ruback, 2003). When considering whether one of the two options would
be an appropriate growth strategy for your company, it is important to consider both the
opportunities and the potential pitfalls (Chris, 2007).
Recognizing both the opportunities and potential issues of mergers and acquisitions will help you
develop the corporate growth strategy that is right for you. Given a sluggish economy, now may
be the best time for you to consider the benefits of a merger or acquisition. With help from a
business growth consulting like Connell Curtis you can develop successful corporate growth plan
that meet your strategic objectives (Kroph et all, 2007).

Chapter-03: Case development and analyses


3.1 Case-01: Pfizer Taking over Hospira
Pfizer Inc. and Hospira, Inc. have announced that they have entered into a definitive merger
agreement under which Pfizer will acquire Hospira. It is the worlds leading provider of
injectable drugs and infusion technologies and a global leader in biosimilars. The company has
$90 a share in cash for a total enterprise value of approximately $17 billion. The Pfizer-Hospira
combination is an excellent strategic fit, presenting a unique opportunity to leverage the
complementary strengths of our robust portfolios and rich pipelines The Boards of Directors of
both companies have unanimously approved the merger. The agreement will increase the value
of the company by $0.10 - $0.12 per share for the first full year following the close of the
transaction with additional accretion anticipated thereafter.
The Chairman and Chief Executive Officer if Pfizer, Ian Read Said that, The proposed
acquisition of Hospira demonstrates our commitment to prudently deploy capital to create
shareholder value and deliver incremental revenue and EPS growth in the near-term." He also
Added, Hospiras business aligns well with our new commercial structure and is an excellent
strategic fit for our Global Established Pharmaceutical business, which will benefit from a
significantly enhanced product portfolio in growing markets. Hospira is expected to drive
greater sustainability for their Global Established Pharmaceutical business over the long term
Coupled with Pfizers global reach.
This strategically complementary combination will add a growing revenue stream and a platform
for growth for Pfizers GEP business. The expanded portfolio of sterile injectable
pharmaceuticals composed of Hospiras broad generic sterile injectables product line. The major
product line of Hospira including acute care and oncology injectables, with a number of
differentiated presentations, as well as its biosimilars portfolio, combined with GEPs branded
sterile injectables, including anti-invectives, anti-inflammatory and cytotoxics, will create a
leading global sterile injectables business.

The combination also reinforces GEPs growth strategy to build a broad portfolio of biosimilars
in Pfizers therapeutic areas of strength through the addition of Hospiras portfolio that includes
several marketed biosimilars. Pfizer will also use its existing commercial capabilities, global
scale, scientific expertise and world class development capabilities to significantly expand the
reach of Hospiras products, which are currently distributed primarily in the United States, to
Europe and key emerging markets, where GEP has a significant presence.
Hospira has the potential to fundamentally improve the growth trajectory of the Global
Established Pharmaceutical business, vault it into a leadership position in the large and growing
off-patent sterile injectables marketplace. We're excited to combine Hospiras expertise and key
talent with that of Pfizer to create a leading global business that will deliver an even broader
portfolio of important and life-saving sterile injectable medicines to patients around the world."
said John Young, group president of Hospira.
The Chief Executive Officer of Hospira noted that, "I want to recognize and thank our 19,000
employees around the world for their tireless efforts to deliver more affordable healthcare
solutions, increase patient access to high-quality care and drive sustained growth for our
shareholders."
Both sterile injectables and biosimilars are large and growing categories. The global marketplace
value for generic sterile injectables is estimated to be $70 billion in 2020. The global
marketplace for biosimilars is estimated to be approximately $20 billion in 2020. Pfizer expects
to finance the transaction through a combination of existing cash and new debt, with
approximately two-thirds of the value financed from cash and one-third from debt. In addition,
Pfizer anticipates the transaction to deliver $800 million in annual cost savings by 2018.

3.1.1 Company Overview

Pfizer Overview
Pfizer Inc is the worlds largest research-based pharmaceutical company. It discovers, develops,
manufactures and markets prescription medicines in 11 therapeutic areas including oncology,
cardiovascular, pain, neuroscience and infectious diseases, including HIV/AIDS. Pfizer is also
the worlds largest animal health company.
Pfizer Inc. employs approximately 90,000 colleagues worldwide. All of the employees are
devoted to working for a healthier world. Pfizer conducts more biomedical research than any
other organization. The company has 12,000 professionals working in six major R&D sites
worldwide including Sandwich in Kent. Pfizers annual UK R&D investment is more than 550
million more than 10 million a week. In the UK, Pfizer has its European R&D headquarters at
Sandwich and its UK business headquarters in Surrey, and is the major supplier of medicines to
the NHS.

Hospira Overview
Hospira is an American global pharmaceutical and medical device company with headquarters
in Lake Forest, Illinois. It has approximately 15,000 employees. Hospira is the world's largest
producer of generic injectable pharmaceuticals. It manufactures generic acute-care and oncology
injectable, as well as integrated infusion therapy and medication management systems. Hospira's
products are used by hospitals and alternate site providers such as clinics, home healthcare
providers and long-term care facilities (The Economic Times, 2009). It was formerly the hospital
products division of Abbott Laboratories. On September 3, 2015, Hospira was acquired by
Pfizer.

3.1.2 SWOT Analysis of the Companies

A SWOT analysis is a tool that identifies the strengths, weaknesses, opportunities and threats of
an organization. Specifically, SWOT is a basic, straightforward model that assesses what an
organization can and cannot do as well as its potential opportunities and threats. The method of
SWOT analysis is to take the information from an environmental analysis and separate it into
internal and external issues. Once this is completed, SWOT analysis determines what may assist
the firm in accomplishing its objectives, and what obstacles must be overcome or minimized to
achieve desired results.
The SWOT analysis of Pfizer is drawn here,

Strength

Weakness

1. World largest pharmaceutical company


2.It has 100000 employees
3.Strong brand loyalty and excellent
research and development

1. Limited scope for market share growth


2. Negative brand Marketing
3. Faces tough competetion

Pfizer SWOT
Analysis
Opportunity

Threats

1. Increase healthcare awernwss


2. Increse demand for healthcare sollutions
3. Global penetration through merger and
acquisitions.

1. Risk of unsuccessful new products


2. Regulatory market is becoming more
srtingent
3. Economic slowdown.

Figure: 01

The Strength of Pfizer Inc. includes its existing market condition, more than 10 million
employees and excellent brand loyalty compared with the limited scope of growth, negative
brand marketing as Weakness. The company has embraced global mergers and acquisitions to
encounter the threats like economic slowdown.

The SWOT analysis of Hospira is stated here,

Weakness
Strength

1. Less Investment in research and

1. Cost effective
2. Strong manufacturing base
3. Diverse Ecosystem

development
2. Lack of Coordination between industry
3. Manufacture low quality and fake
products

SWOT Analysis
of Hospira
Opportunities
1. Increased export potential
2. Key Player in global pharmaceutical
R&D
3. Export of generic drugs to developed
markets

Threats
1. The new MRP based excise duty
2. Pressure to reduce price

Figure: 02

Cost effectiveness and diverse ecosystem is the major power of Hospira. Weak coordination
between functions and low quality or fake products are the weakness of it. If the company can
manage its prominent risk of reduce price it will be able to enjoy the opportunities to export, and
become the leader in the global pharmaceutical R& D.
3.1.3 Building Blocks of Competitive Advantage

Organizations today confront new markets, new competition and increasing customer
expectations. Thus todays organizations have to constantly re-engineer their business practices
and procedures to be more and more responsive to customers and competition. In the 1990s
Information technology and Business Process re-engineering, used in conjunction with each
other, have emerged as important tools which give organizations the leading edge. The efficiency
of an enterprise depends on the quick flow of information across the complete supply chain i.e.
from the customer to manufacturers to supplier. The generic building blocks of a firm help to
gain competitive advantage are- Quality, Efficiency, Innovation and Customer responsiveness.

Figure: 03

Any company can pursue one of the two strategies either Low cost or Differentiation.
Competitive advantage means earning profit greater than the average in the same industry for a
specific period of time. Organizations can focus on Superior Quality, Superior Efficiency,
Superior innovation and Superior Customer responsiveness to achieve strategic goals.
The Building Blocks of Pifzer are illustrated in the following figure,

Area of Attention to Gain Competitive


Advantage(Pfizer)
10%
30%
20%

Superior Ouality
Superior Innovation
Superior Low Cost
Superior Customer responsiveness

40%

Figure: 04

Pfizer invest a huge amount of funds in the Research and Development sector. It enables the
company to discover new types of products and provide them the opportunity to charge premium
price and earn profit through patents. Pfizer concentrate most on the superior innovation on the
four core building Blocks. It also focuses on quality, Low cost and customer responsiveness.
Building Blocks of Hospira looks like the followings,

Area of Attention to Gain Competitive


Advantage(Hospira)
20%

30%

Superior Quality

15%

Superior Innovation
Superior Low Cost

35%

Superior Customer
responsiveness

Figure: 05
Hospira is the worlds largest generic Injectable medicine producer. It mostly focuses on
customer responsiveness and low cost. Though they dont rely most on own Innovation but
maintains a good quality of their products.

3.1.4 Porters Five Forces Model of the Industry

Porter's Five Forces Model helps strategic business managers analyze the industry in which their
companies operate to determine what can be done to get an advantage over their existing
competitors and also to determine how attractive a particular industry would be for new entrants.
Porter's Five Forces are:
1) Threats of entry posed by new or potential competitors;
2) Degree of rivalry among existing firms;
3) Bargaining power of buyers;
4) Bargaining power of suppliers and
5) Closeness of substitute products.
Below is a Porters Five forces analysis of the Global Pharmaceutical Industry:

Figure: 06

1. Threats of entry posed by new or potential competitor (LOW)

High entry barriers due to costs associated with research & development of new drugs

Government regulation

The threat of entry posed by new or potential competitor is a LOW competitive force due
to the above entry barriers & regulatory constraints.

2. Degree of rivalry among existing firms (HIGH)

High rivalry among main companies in the industry.

The degree of rivalry among existing firms is a HIGH competitive force

3. Bargaining power of buyers (MEDIUM)

Hospitals & other health care organizations buy in bulk quantities and exert pressure on
pharmaceutical companies to keep prices in check

Regular patients have lost bargaining power due to price increases in generic drugs

The bargaining power of buyers is a MEDIUM competitive force.

4. Bargaining power of suppliers (LOW)

Sales for the pharmaceutical industry concentrate in a handful of large players and that
has decreased the bargaining power of suppliers.

The bargaining power of suppliers is a LOW competitive force

5. Closeness of substitute products (HIGH)

Demand for generic versus brand name drugs has increased because of the costs

Generic drug companies do not have the high costs associated with the research &
development of new drugs and that allows them to sell at cheaper prices

The closeness of substitute products is a HIGH competitive force

Overall and based on the above analysis of Porters Five Forces, we can conclude that the
pharmaceutical industry is not attractive for new entrants.

3.1.5 Strategic Motives for Acquisition

Hospira is a leader in sterile injectables and biosimilar pharmaceuticals. Biosimilars are drugs
that are similar to a drug whose patent has recently expired. Pfizers Global Established
Pharmaceutical business contains Pfizer brands that have lost market exclusivity, the mature,
patent-protected products that are expected to lose exclusivity, and generic pharmaceuticals.
Pfizers biosimilar portfolio would be included in this category as well.
Sterile injectables and biosimilars are high-growth areas, and the addressable market for both
products is expected to reach $90 billion by 2020.

Figure: 07

1. Pfizer will get the access Hospiras Established Global Pharmaceutical Business
Hospira is the worlds leading provider of injectable drugs and infusion technologies and a
global leader in biosimilars. The company has a huge customer group. Pfizer will get all the
customers, existing supply chain, established technology and most valuable 19000 loyal,
experienced employees.

2. Cost Savings and Synergies

While one of the major drivers for the HospiraPfizer transaction is the expected growth of the
sterile injectables and biosimilar markets, there are also synergistic benefits to it. Pfizer expects
to achieve $800 million in annual cost savings by 2018 and expects the transaction to
contribute immediately to earnings upon closing. The company expects to see a contribution of
approximately $0.10$0.12 per share in the first full year after closing, and more from additional
synergies later on.
3.1.6 Comparison between Pre and Post Merger Situation

Pfizer apply science and our global resources to bring therapies to people that extend and
significantly improve their lives. It strives to set the standard for quality, safety and value in the
discovery, development and manufacture of health care products. Their global portfolio includes
medicines and vaccines as well as many of the world's best-known consumer health care
products. Every day, Pfizer colleagues work across developed and emerging markets to advance
wellness, prevention, treatments and cures that challenge the most feared diseases and expand
access to reliable, affordable health care around the world. For more than 150 years, Pfizer has
worked to make a difference for all who rely on them. The most important impact of the
acquisition is that Pfizer may decide to spin off its GEP operations into a separate business
altogether. The resulting GEP unit would make the worlds biggest generic drug company. The
acquisition can materially improve the long-term cash flow profile for Pfizers GEP division. It
will facilitate the likely spin out anticipated post 2017. Its all about fattening up the established
pharmaceutical business. The consumers can get the established products into a much larger
organization and potentially spin that off.
Pfizer stock is one of the cheapest, relative to comparable peers, and the reason for that is its
conglomerate structure. A potential catalyst can be taken place in 2015-2016 While a Pfizer
break-up would likely be a 2017. Three years of audited financial statements (2014-2016) are
required before any part of Pfizer can be spun off. 2017 can be seen as an attractive time for
investors to see Pfizers innovative pipeline clearly contributing to growth and the established
business having transitioned to a more stable profile.

3.1.7 Impact of the Acquisition in the Sustainable Competitive Advantage

This release contains forward-looking information related to Pfizer and the acquisition of
Hospira by Pfizer that involves substantial risks and uncertainties that could cause actual results
to differ materially from those expressed or implied by such statements. Forward-looking
statements in this release include, among other things, those about the potential benefits of the
acquisition, anticipated synergies, accretion and growth, the combined company's plans and
prospects, the financial condition, results of operations and business of Pfizer and anticipated
industry growth rates. Risks and uncertainties include, among other things, risks related to the
ability to realize the anticipated benefits of the acquisition, including the possibility that expected
synergies will not be realized or will not be realized within the expected time frame; the risk that
the businesses will not be integrated successfully; disruption from the transaction making it more
difficult to maintain business and operational relationships; significant transaction costs;
unknown liabilities; the risk of litigation and/or regulatory actions related to the acquisition;
other business effects, including the effects of industry, market, economic, political or regulatory
conditions; future exchange or interest rates; changes in tax laws, regulations, rates and policies;
the uncertainties inherent in research and development; and competitive developments.

3.2 Case-01: Facebook Inc. (FB) and WhatsApp


In February 2014 Facebook announced the firms biggest acquisition ever. Facebook CEO Mark
Zuckerberg managed to agree on the deal with WhatsApp founders Jan Koum, and Brian Acton
for astonishing $22 billion. Reuters stated that acquisition was the sixth biggest in technologies
and biggest ever in history of acquisitions of software companies. In the moment of announcing
the acquisition, WhatsApp had more than 450 million of active users. Application reached that
number faster than any other company in history. When comparing with Facebook, they went
over 100 million users in something over 2 years. Facebook needed one more year. Every day,
more than a million installed the app that time. Engagement rates were also incredible, as more
than 72% remained active daily. Industry standard was around 10 to 20 percent.
It may sound unbelievable, but only 32 people were working in the company in February. Later
in October, when merger was realized, company was employing 56 people. When calculating
employee to customer ratio, one WhatsApp developer was serving more than 14 million active
users. Once again, number unheard in the business before. While the team remained small,
service was still highly reliable with uptime over 99.9%. Number any user in need of instant
communication will definitely like. Company decided to have different style from beginning.
Purity was on the first place. There were neither marketing tricks nor strong promotions
campaigns to support the application.
This is total amount of money company has invested in marketing. The company did not employ
any employee to conduct marketing. There is no better marketing than a word of mouth. All
customers were quickly encouraging their friends to try the service.
Back in April 2012, Facebook bought Instagram, iPhone application of the year in 2011, for 1
billion dollars. And some said it was overpriced. What must these people thought when Mark
Zuckerberg announced new buy operation worth $19 billion at first word and nearly $22 billion
when signing? And why was he willing to do so?

Engagement rate of WhatsApps users was unseen before. It was mainly driven by its
availability, reliability and mostly by its simplicity. More importantly, application became
attractive also to teens. Target group that is looking for new platforms and ways of
communication and that is not so attracted by the biggest social network as others. Facebook was
all around a while, but acquiring WhatsApp would enable company to practically reach users on
mobile devices using fresh instant messaging service.
Security is something more and more users are looking for nowadays. Mainly when comparing
with other services like Skype known for their security vulnerabilities and possible monitoring.
Within WhatsApp, every message was deleted from servers upon processing.
Firstly, Facebook offered unimaginable amount of $19 billion to buy WhatsApp. Koum holding
bigger share in WhatsApp was to get about $6.8 billion and Acton $3.5 billion after taxes. Jan
Koum was also granted a seat on the Facebook board with salary of 1 dollar. Facebook gave
177.8 million of its Class A common stock shares and $4.59 billion in cash to WhatsApps
shareholders. Fortunately for WhatsApp owners, Facebooks share value had risen from
February 2014 to October 2014 when deal was realized by another $2.8 billion. In the end,
acquisition was worth $21.8 billion.
Koum and Acton were pretty clear about how the deal should work. They already had a good
arrangement with their venture capital backer. All they asked for was independence. They were
known not only because of not having any door sign, but they also rarely went to Silicon Valley
networking events and they didnt negotiate about WhatsApp even there were constant offers.
Zuckerberg understood the principles on which WhatsApp, and Instagram similarly works. He
bought the companies, but let them operate as independent entities. Koum was select to serve as
WhatsApp Chief Executive and become a Facebook director. His salary was set to $1, equal to
the Marks one. Company was set to continue its operations from their base in Mountain View.

3.2.1 Company Overview

Facebook overview
Facebook, Inc., incorporated on July 29, 2004, is a social networking company. The Company
builds engaging products that enables people to connect and share through mobile devices and
personal computers. The Company offers various services focused on people, marketers and
developers. It offers online and mobile-based platform for people to share their opinions, ideas,
photos and videos, and to engage in other activities. The Companys products include Facebook,
Instagram, Messenger and WhatsApp. As of December 31, 2014, the Company had 890 million
daily active users. The Companys subsidiaries include Andale, Inc., Facebook Operations, LLC,
Oculus VR, LLC and Parse, LLC, in Delaware; Edge Network Services Limited, Facebook
Ireland Holdings Limited and Facebook Ireland Limited, in Ireland, and Pinnacle Sweden AB, in
Sweden.
Whatsapp overview
WhatsApp Inc. operates as a cross-platform mobile messaging company. The companys crossplatform communication application allows users to exchange unlimited text and multimedia
messages, such as audio, video, and photo messages without having to pay for short messaging
service fees. It supports iPhone, blackberry, android, windows, Nokia, and Symbian platforms.
The company was founded in 2009 and is based in Santa Clara, California. As of October 6,
2014, WhatsApp Inc. operates as a subsidiary of Facebook, Inc.

3.2.2 SWOT Analysis of the Companies

A SWOT analysis is a tool that identifies the strengths, weaknesses, opportunities and threats of
an organization. Specifically, SWOT is a basic, straightforward model that assesses what an
organization can and cannot do as well as its potential opportunities and threats. The method of
SWOT analysis is to take the information from an environmental analysis and separate it into
internal and external issues.
The SWOT analysis of Facebook Inc. are drawn below,

Strength
1. Integration with websites and applications.
2. Excellent user experience.
3. More than a billion monthly active user.
4. Understanding of user needs and
behaviour.

Weakness
1. Weak CTR of advertisement.
2. Attitude towards users privacy.
3. Weak protection of user information

SWOT
Analysis of
Facebook
Opportunities
Threats

1. Increasing number of people using


facebook through mobile phone.
2. Expansion to China.
3. Open facebook marketplace.

1. User using ad-block extensions


2. Identity theft

Figure: 08

Excellent user experience and more than billion active users are the strength of Facebook. Lack
of privacy is the main weakness of Facebook since its establishment. The most important
opportunity for Facebook is to expand in china to acquire 150 million populations. Identity theft
will be the most awful threat for Facebook.

The SWOT analysis of WhatsApp is just like the below,

Strength

Weakness

1. Profitability with a large number of users.


2. No need to manually add friends.
3. Available across different platforms.

1. Only works with a data plan or wifi.


2. Not diversified enough because
competitors offer the same features.

SWOT Analysis
of WhatsApp
Opportunities
1. Growing number of smartphone user.
2. Growing customer base.
3. Implementing video call with real time
adding features.

Threats
1. Popular competitors like viber , wechat
,skype.
2. Similar applications that come for free.

Figure: 09

Large number of users worldwide and ease of use is the strength of WhatsApp. The company is
less diversified compared to the competitors is the drawback. Implementing video call can be an
excellent opportunity if it can handle other free similar applications in the same industry.

3.2.3 Building Blocks of Competitive Advantage

Organizations today confront new markets, new competition and increasing customer
expectations. Thus todays organizations have to constantly re-engineer their business practices
and procedures to be more and more responsive to customers and competition. The efficiency of
an enterprise depends on the quick flow of information across the complete supply chain i.e.
from the customer to manufacturers to supplier.
The generic building blocks of Facebook Inc. are the followings,

Generic building blocks of Facebook Inc.


50
45
40
35
30
25
Generic building blocks of
Facebook Inc.

20
15
10
5
0
Superior
Innovation

Superior
efficiency

Superior
Superior quality
customer
responsiveness

Figure: 10

Facebook consistently focuses on Innovation. It is adding new features to its users on a regular
basis. Superior innovation is the core strategy for Facebook to gain competitive advantage over
the rivals. It operates on low cost and users dont need to pay anything for using Facebook.
Facebook is comparatively easy to operate and user friendly. It always maintains quality on its
services.

Generic building blocks of Whatsapp


25
20
15
Generic building blocks of
Whatsapp

10
5
0
Superior
Innovation

Superior
efficiency

Superior
Superior Quality
customer
responsiveness

Figure: 11

The core important area WhatsApp put on is the Superior Efficiency. It doesnt need any data to
transfer files and images. Though it has limited investments in Innovation but it dont
compromise on quality. However, Customer responsiveness is relatively low in WhatsApp.

3.2.4 Porters Five Forces Model of the Industry

Porters 5 forces model up to some extent has failed to recognize the power of the
communication media and its impact on consumer behavior, which eventually impacts their
buying decisions. In the past decade or so, people have become more internet and social media
savvy. Posting reviews on products and services being offered, sharing information about brands
and offering; both positive and negative, and providing instructions to users to get the most out
of products is what this part of the community offers and this makes it almost impossible to
ignore the power consumers and social media (Barbara, 2011).
Social Media Industry can be seen in two types of business models,
1. Business-to-Business
2. Business-to-Customer

Lot of organizations tend to promote their brands themselves and lot prefer to promote others as
a part of their business models generally known as agencies so we will consider both the models
in Porters five force model.

Figure: 12

1. Threats of entry posed by new or potential competitor


In terms of both the business models, social media has almost negligible entry barriers which
come with economies of scale which provides new entrants an opportunity to analyze the market
properly. In B2B model, agencies initially have to face low buyer loyalty, shift in focus during
the process if model fails to sustain but it also comes with advantages like low initial investments
in starting the agencies and price-performance decision powers and adaptability by reducing both
according to the clients budgets which also means that a new entrant can also challenge an
established player with a proper strategic planning on the basis of costs (Octazen, 2007).

2. Closeness of substitute products


Substitutes are fairly self-explanatory. Again they can be considered in terms of competition and
other online marketing options available in the market for example Search Engine Optimization
and Search Engine Marketing. But second option cannot be considered as an entire switch as
social media marketing is much cheaper, effective, and quick as it takes less time to establish
than Search Engine Optimization or Search Engine Marketing.
3. Bargaining power of buyers
Social media Industry has a huge impact on buyers; as an end user of the product, in terms of
purchasing decisions only as main motive behind this is brand positioning. Having said that,
buyer still possesses significant amount of control as industry has got great exposure which
provides number options (Christopher and Sapienza, 2009). In business models, types of buyers
differ from organization to organization. If an organization is promoting itself on different
platforms of social media, then its the end user of their product i.e. customer and if an
organizations is working as an agency which promotes other brands on social media platforms,
then those organizations are their buyers.
4. Bargaining power of suppliers
Supply is an issue in terms of knowledge and experience which faces bottleneck. Those who
have experience can provide confidence to their clients or the upper management in respective
business models but those without experience present greater risk in an industry which is already
has been looked upon as risky so experience becomes exponential while inexperience struggles.
5. Degree of rivalry among existing firms
Competition is a crucial part of social media industry which has various faces. Considering B2B
model, theres a large pool of agencies in the social media industry and severe price undercutting
is endemic which acts as a substitute not in terms of product but in terms of competition but
this seems to be characteristic of an industry which is still maturing.

3.2.5 Strategic Motives for Acquisition

WhatsApp was emerging as one of the major rivals of Facebook in recent times. Facebook is the
market leader in the Social media industry. It has acquired whatsApp for $22 billion. Some
specialist believes that the value is overestimated. Now lets see what the reasons are what
provokes Facebook to purchase WhatsApp,
The target is reaching 5.6 billion smartphone users by 2019
The major growth will be in emerging economies, where WhatsApp is well-established
The deal pre-empts Asian messaging apps from closing Facebook out of the emerging
nations
Facebook is confronted by three large and well-funded messaging providers based in
Asia
It fits with Zuckerberg's mobile strategy of standalone mobile brands
These brands are diversifying Facebook group and its revenues
WhatsApp co-founder and new Facebook board member Jan Koum is a mobile guru
3.2.6 Comparison between Pre and Post Merger Situation

WhatsApp is by far Facebook's largest acquisition and one of the biggest Silicon Valley has ever
seen. It is over 20 times larger than Facebooks Instagram acquisition, which made quite the
splash in 2012.
The answer is user growth. Over 500 million people use WhatsApp monthly and the service
currently adds more than 1 million users per day. Seventy percent of WhatsApp users are active
daily, compared to Facebooks 62% (Facebook to Acquire WhatsApp, 2014). Additionally,
WhatsApp users send 500 million pictures back and forth per day, about 150 million more than
Facebook users.
The app launched in 2009 and will reach 1 billion users before long thanks to its astronomical
growth. As of December 2014, Facebook has 1.39 billion monthly active users. The merging of
forces will likely accelerate growth for both companies.

Figure: 13

WhatsApp will help fuel Facebook growth in developing markets where internet connectivity is
sparse but where WhatsApp is widely used. Facebook will then gain access to these mobile user
bases.

Connecting

to

WhatsApp

users

in

these

areas

will

also

aid

Facebooks Internet.org initiative, Facebook CEO Mark Zuckerbergs plan to implement internet
access to the two-thirds of the world not yet online.
However, Facebook does believe it will profit from WhatsApp down the line as phone calls
become obsolete and mobile messages reign. This is why Zuckerberg spent one-tenth of his
companys market value to buy the text messaging app, nearly doubling Googles bid. In doing
so, he successfully kept the company out of the hands of other tech rivals.

3.2.7 Impact of the Acquisition in the Sustainable Competitive Advantage

This is not the first time that an app has seen a major pop in users after it was acquired by
Facebook. When Facebook bought Instagram in April 2012, the service boasted some 30 million
users. In one month after the deal, Instagram gained 20 million new users. By July,
Instagram grew to 80 million active users. Adding an Android app in addition to its iPhone app
certainly helped, but the Facebook effect is a definite reality. Instagram managed to increase its
user base by more than 10 million users on average per month.
WhatsApp seems to be having a similar growth spurt, gaining roughly 25 million users each
month since the Facebook deal was announced. Even for an app with astronomic growth like
WhatsApp, those are impressive numbers.
Its clear that WhatsApp has the legs to grow in both developed and emerging markets,
especially as a cheap alternative to SMS. The chart below from analytics firm comScore shows
just how much the service had grown prior to being bought by Facebook.
At this rate, it should only take less than a year for WhatsApp to reach a billion users worldwide.
Facebook is still in the process of completing its $19 billion purchase of WhatsApp, which
included cash and various stock options. The deal has been approved by the Federal Trade
Commission but still needs international regulatory approval before the purchase can become
final.

Chapter-04: Comparison between the Two Cases


In the report the two different cases have been discussed. One is on Pfizer gets Hospira and the
other is about Facebook bought WhatsApp. The two transactions have lots of distinctions. First
of all, the two cases deals with two different types of industries. Pfizer does the business in
Pharmaceutical industry. Its main operation is research based. Facebook earns profit by giving
other companies advertising opportunities through its network. Facebook operates in the worlds
social media industry.
Second, the difference exists in the structure of their respective industry competitive
environment. The pharmaceutical sector is less competitive than the social media. As a large
number of firms operate in the industry. The success of the company depends on innovative
ideas, low cost and most importantly the quality of the products. All the things are important in
case of drugs. On the other hand there are few large firms in the social media industry. It takes
huge time and effort to get established in the industry. The risks are low for the established
companies.
Third, the entry barriers in the pharmaceutical industry are govt. regulated. Thus there is a
structured entry barriers exist in the industry. But In social media market, the resource and
capabilities and established technologies are the barriers for new entrants.
Fourth, it can be clearly seen that Hospira is not a direct competitor of Pfizer. Both of the
companies have different business sections in the same industry. Pfizer is basically research
based company focuses on innovation. Hospira deals with production of Injectable goods. But
WhatsApp is surely a competitive threat for Facebook.
Fifth, the next difference is about the post-acquisition situation. Pfizer and Hospira operate
together after the transaction took place. Hospira was merged with Pfizer as a single company.
In case of Facebook it let WhatsApp to do business as a subsidiary under the ownership and full
control of Facebook.
Sixth, the transaction of the two acquisitions is different in terms of payment. Pfizer paid Hospira
from its own fund and by lending from the creditors. Again Facebook paid WhatssApp the
consideration in money and share of Facebook.

Seventh, Pfizer is a UK based company. It buys the American company in case one. In contrast
both Facebook and WhatsApp are American companies.
Eighth, the strategy of the two companies seems different in Pfizer and Hospira Acquisition. One
deal with research and the other is the Injectable medicine producer. Facebook and WhatsApp
both have the same strategy to link the worlds people together and establish social network
among them.

Findings & Analysis


The finding of the study is quite amazing. The two cases revealed different interesting but
important issues. Pfizer is the worlds largest research based pharmaceutical company. It has a
huge investment in developing new types of medicines. It continuously finds for the medical
solutions to invest the cures the world cannot wait for it. The company is also the worlds largest
animal medicine producer. The principal R&D base of Pfizer is situated in UK. It has more than
90000 employees. Again Hospira is an American Company. It produces generic Injectable
medicines. It has almost 15000 workers worldwide. Recently Pfizer has acquired Hospira. It has
created a great impact on the global pharmaceutical industry. The research based company is
now merged and have full access with the Injectable medicines supply chain. Pfizer will cost 1$7
billion to buy Hospira. It will get the technology and innovation developed by Hospira. The
merger will generate a long term impact in the world healthcare system and the cost.
Facebook Inc. was founded in 2004. It is a social networking site. WhatsApp was seemed as a
major rival of Facebook. WhatsApp had almost 450 million active users worldwide. Facebook
took a brave initiative to buy WhatsApp with a huge amount of return of around $22 billion.
Though the real value of WhatsApp was less than that but Facebook took this brave decision for
cash payment and a larger number of share to WhatsApp owner. The prediction of Facebook
didnt fail. By only three months the share value of Facebook increases rapidly. It benefitted both
the Facebook and the WhatsApp. Facebook got access of the 450 million active users of
WhatsApp. In return WhtasApp got huge cash and ownership in Facebook and the value of those
shares values have also increased within a short time period.

Recommendation
There are many risks are associated with international merger and acquisition. Firms are trapped
in Icarus Paradox. They just want to boost so fast and fall into ground. It is not wise to acquire a
company with limited resources and capabilities with an overestimated price. The over valuation
of brand value and other assets result in failure of integration (Gregor and Staford, 2007).
Sometimes the mergers dont match equally because of cultural and social issues as well as
business practices. Firms should make a business plan and strategies before purchasing a
business unit of another industry and search for the capabilities to operate it. The new employees
of the acquired company should be made understand the company vision, mission and
objectives. Pfizer has bought Hospira which is slightly related to its existing business. The
company can add a new section of its R&D sector to innovate new ideas on generic Injectable
medicines and make a huge profit. Facebook also has the opportunity to add the features of
WhatsApp in its system and make it more attractive. The company can reach the uncovered
customers through the existing network of WhatsApp. Recently Facebook has also acquired
Instagram. It has become the company more powerful and aids in capturing the largest share in
the social media market. Vulnerability of users data is the most serious weakness of Facebook. If
it can improve it there is no doubt about the fact that it will remain as the market leader for the
next few decades.

Conclusion
Global merger and acquisitions have great business impact in the overall industry. One major
merger or acquisition can change the entire competitive environment of the industry. Sometimes
companies merger to survive or to enjoy monopoly over the other firms. Acquisitions can be
happen within an industry or with another industry. Companies sometimes expend its operations
through its existing product lines. At the same time some firms inaugurate new business units in
a new industry. Merger and take over decisions should be made with proper analysis and
estimation. Because, most of the global companies fail to anticipate the associated risks and
threats of merger and acquisitions. So if a company can make a decision for a successful merger
it will either give the company sustainable competitive advantage or sustainability in the existing
market.

References
1.

Amihud, Yakov, and Baruch Lev, 1981, Risk reduction as a managerial motive for
conglomerate mergers, Bell Journal of Economics 12, 605-617.

2.

Andrade, Gregor, and Erik Stafford, 2001, New evidence and perspectives on mergers,
Journal of Economic Perspectives 15, 103-120.

3.

Babcock, Linda, Xianghong Wang, and George Loewenstein, 1996, Choosing the wrong
pond: Social comparisons in negotiations that reflect a self-serving bias, Quarterly Journal
of Economics 116, 1-19.

4.

Birru, Justin, 2009, Confusion of confusions: A test of the disposition effect on


momentum, New York University working paper.

5.

Boone, Audra L., and J. Harold Mulherin, 2007, How are firms sold? Journal of Finance
62, 847-875.

6.

"Facebook to Acquire WhatsApp". Facebook. 19 February 2014.

7.

Grinblatt, Mark, and B. Han, 2005, Prospect theory, mental accounting, and momentum,
Journal of Financial Economics 78 (2), 311-339.

8.

Grinblatt, Mark, and Matti Keloharju, 2001, What makes investors trade? The Journal of
Finance, 56 (2), 589-616.

9.

Hernandez, Barbara E. (13 October 2011). "Facebook Acquires Startup Friend.ly". NBC Bay
Area. Retrieved5 May 2012.

10.

Jensen, Michael C., and Richard S. Ruback, 2003, The market for corporate control: The
scientific evidence, Journal of Financial Economics 11, 5-50.

11.

Jovanovic, Boyan, and Peter Rousseau, 2002, The Q-theory of mergers, American
Economic Review 92, 198-204.

12.
13.

Le rachat stratgique de Hospira par Pfizer [archive], l'Opinion, 5 fvrier 2015


Lang, Larry H.P., Rene M. Stulz, and Ralph A. Walkling, 1989, Managerial performance,
Tobins Q, and the gains from successful tender offers, Journal of Financial Economics 24,
137-154.

14.

Mitchell, Mark L., and Kenneth Lehn, 1990, Do Bad Bidders Become Good Targets?
Journal of Political Economy 98, 372-398.

15.

Northcraft, Gregory B., and Margaret Ann Neale, 1987, Experts, amateurs, and real estate:
An anchoring-and-adjustment perpective on property pricing decisions, Organizational
Behavior and Human Decision Processes 39, 228-241.

16.

"Octazen: What The Heck Did Facebook Just Buy Exactly, And Why?". TechCrunch. 201002-19. Retrieved 2010-10-30

17.

Pfizer to buy Hospira for $15 billion to bolster hospital products [archive], Caroline Humer
et Ransdell Pierson, Reuters, 5 fvrier 2015

18.

Pfizer moves higher amid persistent breakup talk". Bloomberg Businessweek. 27 March
2012. Retrieved 8 July 2012

19.

Polk, Christopher, and Paola Sapienza, 2009, The stock market and corporate investment:
A test of catering theory, Review of Financial Studies 22, 187-217.

20.

Rhodes-Kropf, Matthew, David T. Robinson, and S. Viswanathan, 2005, Valuation waves


and merger activity: The empirical evidence, Journal of Financial Economics 77, 561-603.

21.

Roll, Richard, 1986, The hubris hypothesis of corporate takeovers, Journal of Business
59, 197-216.

22.

Shefrin, Hersh and Meir Statman, 1984, Explaining investor preference for cash
dividends, Journal of Financial Economics 13, 253-282.

23.

Shefrin, Hersh and Meir Statman, 1985, The disposition to sell winners too early and ride
losers too long: Theory and evidence, Journal of Finance 40(3), 777-90.

24.

"US-based Hospira to buy Orchid Chemicals' injectables biz for $400 mn". The Economic Times. 16
December 2009.

25.

Williams, Chris (October 1, 2007). "Facebook wins Manx battle for face-book.com". The
Register(London). Retrieved June 13, 2008.|