Strategic Level 2

3- HR Integration with Business Strategy

SL II-P2-S46- Mergers and Acquisitions (M&A)

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Subject Code: SL II-P2-S46

HR Merger
Integration s and
with 3) Acquisi
Strategic Business Subject tions
1 Level Level 2 2) Pillar - 2 Strategy Title (M&A)

No of
4 Sessions 02 5) Duration 06hrs (3hrs x 2)
To explain HR’s evolution from an Administrative function to
Pillar a strategic function and as a business partner
6 Focus
HR and Business knowledge, HRM transformation as a
business partner with the knowledge of developing and
changing the organisation and its culture, as well as the
organizational behaviour from the cornerstone of organizational
capability. To drive the HR profession with leadership and
Indicativ personal credibility.
e Job
7 Role
Individual Presentation (20%)

Assessment Modes:
Presentation Individual / 20 Minutes
Description of the assessment
Presentation requirements will be provided at the
inception of the lecture. Students may select one out
Assessm of two. 100 Marks
ent
8 Mode

Conceptual: The interrelationships

among the basic elements within a larger
structure that enable them to function
Knowle together
dge
Dimensi
Procedural: How to do something,
on
methods of inquiry, and criteria for using
skills, algorithms, techniques, and 11) Learning Evaluate / Appraise /
methods. Outcomes Criticize / Design /
9 Action Words Rewrite / Revise

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 Metacognitive: Knowledge of cognition
in general, as well as awareness and
knowledge of one’s own cognition

Evaluating: Make judgments about the

value of ideas or materials.

Creating: Builds a structure or pattern

from diverse elements. Put parts together
to form a whole, with emphasis on creating
a new meaning or structure
Knowle
dge
10 Process
12 Learnin Students will be able to;
g  Evaluate the process of M&A context, strategy and
Outcom execution
es of the  Asses M&A Process and Techniques
subject  Assess human resource management challenges in the
context of M&A
 Design the fusion in M&A through releasing Creative
energy
 Design human resource due diligence and management
requirements

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 Session Topic Areas Covered
1. Merges & 1.1.Definition and Reasons for M&A
Acquisitions 1.2.The different stages of the M&A Process
and HR 1.3.Implementing M&A strategy
Challenges 1.4.Criteria for assessing strategic fit
1.5.Reasons for failure of M&A.
1.6.Statutory & Regulatory dimensions & M&A
agreement
1.7.Best Practices in M&A

2. HR due 1.1.What is Due Diligence

diligence & 1.2.Making due diligence work
Management 1.3.Information required for due diligence.
1.4.Outcome of due diligence
1.5.Practical Challenges in managing due diligence

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 CONTENTS

Page No

Sessions

1. Beyond Competitive Strategy………………………. 06

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Session 1
1.0 Beyond Competitive Strategy

Once a company has settled on which of the five generic strategies to employ, attention turns to
what other strategic actions it can take to complement its choice of a basic competitive strategy.
Several decisions have to be made:

 What use to make of strategic alliances and collaborative partnerships.

 Whether to bolster the company's market position via merger or acquisitions.
 Whether to integrate backward or forward into more stages of the industry value chain.
 Whether to outsource certain value chain activities or perform them in-house.
 Whether and when to employ offensive and defensive moves.
 Which of several ways to use the Internet as a distribution channel in positioning the
company in the marketplace.
Figure 1 shows the menu of strategic options a company has in crafting a strategy and the order in
which the choices should generally be made. The portion of Figure 1 below the competitive
strategy options illustrates the structure of this chapter and the topics that will be covered.

1.1 Strategic Alliances and Collaborative Partnerships

During the past decade, companies in all types of industries and in all parts of the world have
elected to form strategic alliances and partnerships to complement their own strategic initiatives
and strengthen their competitiveness in domestic and international markets. This is an about-face
from times past, when the vast majority of companies were content to go it alone, confident that
they already had or could independently develop whatever resources and know-how were needed
to be successful in their markets. But globalization of the world economy, revolutionary advances
in technology across a broad front, and untapped opportunities in national markets in Asia, Latin
America, and Europe that are opening up, deregulating, and/or undergoing privatization have made
partnerships of one kind or another integral to competing on a broad geographic scale.

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 Many companies now find themselves thrust into two very demanding competitive races: (1)
the global race to build a presence in many different national markets and join the ranks of
companies recognized as global market leaders, and (2) the race to seize opportunities on the
frontiers of advancing technology and build the resource strengths and business capabilities to
compete successfully in the industries and product markets of the future. Even the largest and most
financially sound companies have concluded that simultaneously running the races for global
market leadership and for a stake in the industries of the future requires more diverse and expansive
skills, resources, technological expertise, and competitive capabilities than they can assemble and
manage alone. Such companies, along with others that are missing the resources and competitive
capabilities needed to pursue promising opportunities, have determined that the fastest way to fill
the gap is often to form alliances with enterprises having the desired strengths. Consequently,
strategic outcomes. these companies form strategic alliances or collaborative partnerships in which
two or more companies join forces to achieve mutually beneficial strategic outcomes. Strategic
alliances go beyond normal company-to-company dealings but fall short of merger or full joint
venture partnership with formal ownership ties. (Some strategic alliances, however, do involve
arrangements whereby one or more allies have minority ownership in certain of the other alliance
members.)

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 Figure 1: A Company Menu of Strategy Option

Use the internet as a distribution channel and, if so, to what extent?

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1.1.1 The Pervasive Use of Alliances

Strategic alliances and collaborative partnerships have thus emerged as an attractive means of
breaching technology and resource gaps. More and more enterprises, especially in fast-changing
industries, are making strategic alliances a core part of their overall strategy. Alliances are so
central to Corning's strategy that the company describes itself as a “network of organizations."
Toyota has forged long-term strategic partnerships with many of its suppliers of automotive parts
and components. Microsoft collaborates very closely with independent software developers that
create new programs to run on the next-generation versions of Windows. Oracle is said to have
over 15,000 alliances. Time Warner, IBM, and Microsoft each have over 200 partnerships with e-
business enterprises. Genentech, a leader in biotechnology and human genetics, has a partnering
strategy to increase its access to novel bio therapeutics products and technologies and has formed
alliances with over 30 companies to strengthen its research and development (R&D) pipeline.
Since 1998, Samsung, a South Korean corporation with $34 billion in sales, has entered into 34
major strategic alliances involving such companies as Sony, Yahoo, Hewlett-Packard, Intel,
Microsoft, Dell, Mitsubishi, and Rockwell Automation. Studies indicate that large corporations
are commonly involved in 30 to 50 alliances and that a number have hundreds of alliances. One
recent study estimated that about 35 percent of corporate revenues in 2003 came from activities
involving strategic alliances, up from 15 percent in 1995.2

In the personal computer (PC) industry, alliances are pervasive because the different
components of PCs and the software to run them are supplied by so many different companies--
one set of companies provides the microprocessors, another group makes the motherboards,
another the monitors, another the disk drives, another the memory chips, and so on. Moreover,
their facilities are scattered across the United States, Japan, Taiwan, Singapore, Malaysia, and parts
of Europe. Close collaboration is required on product development, logistics, production, and the
timing of new product releases. To bring all these diverse enterprises together in a common effort
to advance PC technology and PC capabilities, Intel has formed collaborative partnerships with
numerous makers of PC components and software developers. Intel's strategic objective has been
to foster collaboration on bringing next-generation PC-related products to market in parallel so
that PC users can get the maximum benefits from new PCs running on Intel's next-generation
microprocessors. Without extensive cooperation among Intel, the makers of other key PC

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 components, PC makers, and software developers in both new technology and new product
development, there would be all kinds of delays and incompatibility problems in introducing
better-performing PC hardware and software products obstacles that would dampen the benefits
that PC users could get from utilizing Intel's latest generations of chips and lower Intel's chip sales.

1.1.2 Why and How Strategic Alliances Are Advantageous

The value of a strategic alliance stems not from the agreement or deal itself but rather from the
capacity of the partners to defuse organizational frictions, collaborate effectively over time, and
work their way through the maze of changes that lie in front of them technological and competitive
surprises, new market developments (which may come at a rapid-fire pace), and changes in their
own priorities and competitive circumstances. Collaborative partnerships nearly always entail an
evolving relationship whose benefits and competitive value ultimately depend on mutual learning,
cooperation, and adaptation to changing industry conditions. The best alliances are highly
selective, focusing on particular value chain activities and on obtaining a particular competitive
benefit. Competitive advantage can emerge if the combined resources and capabilities of a
company and its allies give it an edge over rivals.

The most common reasons why companies enter into strategic alliances are to collaborate on
technology or the development of promising new products, to overcome deficits in their technical
and manufacturing expertise, to acquire altogether new competencies, to improve supply chain
efficiency, to gain economies of scale in production and/or marketing, and to acquire or improve
market access through joint marketing agreements. A company that is racing for global market
leadership can enhance its chances for success by using alliances to:

 Get into critical country markets quickly and accelerate the process of building a potent
global market presence.
 Gain inside knowledge about unfamiliar markets and cultures through alliances with local
partners. For example, U.S., European, and Japanese companies wanting to build market
footholds in the fast-growing Chinese market have pursued partnership arrangements with
Chinese companies to help in dealing with government regulations, to supply knowledge
of local markets, to provide guidance on adapting their products to better match the buying

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  preferences of Chinese consumers, to set up local manufacturing capabilities, and to assist
in distribution marketing, and promotional activities.
 Access valuable skills and competencies that are concentrated in particular geographic
locations, such as software design competencies in the United States, fashion design skills
in Italy, and efficient manufacturing skills in Japan.
A company that is racing to stake out a strong position in a technology or industry of the future
can enhance its market standing by using alliances to:

 Establish a stronger beachhead for participating in the target technology or industry.

 Master new technologies and build new expertise and competencies faster than would be
possible through internal efforts.
 Open up broader opportunities in the target industry by melding the firm's own capabilities
with the expertise and resources of partners.
Allies can learn much from one another in performing joint research, sharing technological
know-how, and collaborating on complementary new technologies and products—sometimes
enough to enable them to pursue other new opportunities on their own. Manufacturers typically
pursue alliances with parts and components suppliers to gain the efficiencies of better supply chain
management and to speed new products to market. By joining forces in components production
and/or final assembly, companies may be able to realize cost savings not achievable with their own
small volumes—Volvo, Renault, and Peugeot formed an alliance to join forces in making engines
for their large car models because none of the three needed enough such engines to operate its own
engine plant economically. Manufacturing allies can also learn much about how to improve their
quality control and production procedures by studying one another's manufacturing methods. IBM
and Dell Computer formed an alliance whereby Dell agreed to purchase $16 billion in parts and
components from IBM for use in Dell's PCs, servers, and workstations over a three-year period;
Dell determined that IBM's growing expertise and capabilities in PC components justified using
IBM as a major supplier even though Dell and IBM competed in supplying laptop computers and
servers to corporate customers. Johnson & Johnson and Merck entered into an alliance to market
Pepcid AC; Merck developed the stomach distress remedy and Johnson & Johnson functioned as
marketer—the alliance made Pepcid products the best-selling remedies for acid indigestion and
heartburn. United Airlines, American Airlines, Continental, Delta, and Northwest created an

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 alliance to form Orbitz, an Internet travel site designed to compete with Expedia and
Travelocity to provide consumers with low-cost airfares, rental cars, lodging, cruises, and vacation
packages.

Strategic cooperation is a much-favored, indeed necessary, approach in industries where new

technological developments are occurring at a furious pace along many different paths and where
advances in one technology spill over to affect others (often blurring industry boundaries).
Whenever industries are experiencing high-velocity technological change in many areas
simultaneously, firms find it virtually essential to have cooperative relationships with other
enterprises to stay on the leading edge of technology and product performance even in their own
area of specialization.

1.1.3 Alliances and Partnerships with Foreign Companies

Cooperative strategies and alliances to penetrate international markets are also common between
domestic and foreign firms. Such partnerships are useful in putting together the capabilities to do
business over a wider number of country markets. For example, the policy of the Chinese
government has long been one of giving privileged market access to only a few select outsiders
and requiring the favored outsiders to partner in one way or another with local enterprises. This
policy has made alliances with local Chinese companies a strategic necessity for outsiders desirous
of gaining a foothold in the vast and fast-growing Chinese market.

1.1.4 Why Many Alliances Are Unstable or Break Apart

The stability of an alliance depends on how well the partners work together, their success in
adapting to changing internal and external conditions, and their willingness to renegotiate the
bargain if circumstances so warrant. A successful alliance requires real in-the-trenches
collaboration, not merely an arm's-length exchange of ideas. Unless partners place a high value on
the skills, resources, and contributions each brings to the alliance and the cooperative arrangement
results in valuable win-win outcomes, it is doomed. A surprisingly large number of

alliances never live up to expectations. A 1999 study by Accenture, a global business consulting
organization, revealed that 61 percent of alliances either were outright failures or were “limping
along." Many alliances are dissolved after a few years. The high “divorce rate” among strategic

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allies has several causes diverging objectives and priorities, an inability to work well together,
changing conditions that render the purpose of the alliance obsolete, the emergence of more
attractive technological paths, and marketplace rivalry between one or more allies. Experience
indicates that alliances stand a reasonable chance of helping a company reduce competitive
disadvantage but very rarely have they proved a durable device for achieving a competitive edge.
1.1.5 The Strategic Dangers of Relying Heavily on Alliances and Collaborative Partnerships

The Achilles heel of alliances and cooperative strategies is the danger of becoming dependent on
other companies for essential expertise and capabilities over the long term. To be a market leader
(and perhaps even a serious market contender), a company must ultimately develop its own
capabilities in areas where internal strategic control is pivotal to protecting its competitiveness and
building competitive advantage. Moreover, some alliances hold only limited potential because the
partner guards its most valuable skills and expertise; in such instances, acquiring or merging with
a company possessing the desired resources is a better solution.

1.2 Merger and Acquisition Strategies

Mergers and acquisitions are much-used strategic options. They are especially suited for situations
in which alliances and partnerships do not go far enough in providing a company with access to
the needed resources and capabilities. Ownership ties are more permanent than partnership ties,
allowing the operations of the merger/acquisition participants to be tightly integrated and creating
more in-house control and autonomy. A merger is a new opportunity.

pooling of equals, with the newly created company often taking on a new name. An acquisition
is a combination in which one company, the acquirer, purchases and absorbs the operations of
another, the acquired. The difference between a merger and an acquisition relates more to the
details of ownership, management control, and financial arrangements than to strategy and
competitive advantage. The resources, competencies, and competitive capabilities of the newly
created enterprise end up much the same whether the combination is the result of acquisition or
merger.

Many mergers and acquisitions are driven by strategies to achieve one of name. An acquisition is
a five strategic objectives:

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 a. To pave the way for the acquiring company to gain more market share and, further,
create a more efficient operation out of the combined companies by closing high-cost
plants and eliminating surplus capacity industrywide
The merger that formed DaimlerChrysler was motivated in large part by the fact that the
motor vehicle industry had far more production capacity worldwide than was needed;
management at both Daimler Benz and Chrysler believed that the efficiency of the two
companies could be significantly improved by shutting some plants and laying off workers,
realigning which models were produced at which plants, and squeezing out efficiencies by
combining supply chain activities, product design, and administration. Quite a number of
acquisitions are undertaken with the objective of transforming two or more otherwise high-
cost companies into one lean competitor with average or below-average costs.
b. To expand a company's geographic coverage-
Many industries exist for a long time in a fragmented state, with local companies
dominating local markets and no company having a significantly visible regional or
national presence. Eventually, though, expansion-minded companies will launch strategies
to acquire local companies in adjacent territories. Over time, companies with successful
growth via acquisition strategies emerge as regional market leaders and later perhaps as a
company with national coverage. Often the acquiring company follows up on its
acquisitions with efforts to lower the operating costs and improve the customer service
capabilities of the local businesses it acquires.

c. To extend the company's business into new product categories or international

markets
PepsiCo acquired Quaker Oats chiefly to bring Gatorade into the Pepsi family of beverages,
and PepsiCo's Frito-Lay division has made a series of acquisitions of foreign-based snack
foods companies to begin to establish a stronger presence in international markets.
Companies like Nestlé, Kraft, Unilever, and Procter & Gamble all racing for global market
leadership have made acquisitions an integral part of their strategies to widen their
geographic reach and broaden the number of product categories in which they compete.

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 d. To gain quick access to new technologies and avoid the need for a time-consuming
R&D effort
This type of acquisition strategy is a favorite of companies racing to establish attractive
positions in emerging markets. Such companies need to fill in technological gaps, extend
their technological capabilities along some promising new paths, and position themselves
to launch next-wave products and services. Cisco Systems purchased over 75 technology
companies to give it more technological reach and product breadth, thereby buttressing its
standing as the world's biggest supplier of systems for building the infrastructure of the
Internet. Intel has made over 300 acquisitions since 1997 to broaden its technological base,
put it in a stronger position to be a major supplier of Internet technology, and make it less
dependent on supplying microprocessors for PCs. Between 1996 and 2001, Lucent
Technologies acquired 38 companies in the course of its strategic drive to be the technology
leader in telecommunications networking. Gaining access to desirable technologies via
acquisition enables a company to build a market position in attractive technologies quickly
and serves as a substitute for extensive in-house R&D programs.

e. To try to invent a new industry and lead the convergence of industries whose
boundaries are being blurred by changing technologies and new market opportunities
In such acquisitions, the company's management is betting that a new industry is on the
verge of being born and wants to establish an early position in this industry by bringing
together the resources and products of several different companies. Examples include the
merger of AOL and media giant Time Warner and Viacom's purchase of Paramount
Pictures, CBS, and Blockbuster—both of which reflected bold strategic moves predicated
on beliefs that all entertainment content will ultimately converge into a single industry and
be distributed over the Internet. (Neither of these mergers and strategic bets, however, have
proved successful.)

In addition to the above objectives, there are instances in which acquisitions are motivated by a
company's desire to fill resource gaps, thus allowing the new company to do things it could not do
before. Illustration Capsule 6.1 describes how Clear Channel Worldwide has used mergers and
acquisitions to build a leading global position in outdoor advertising and radio and TV
broadcasting.

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All too frequently, mergers and acquisitions do not produce the hoped-for outcomes. Combining
the operations of two companies, especially large and complex ones, often entails formidable
resistance from rank-and-file organization members, hard-to-resolve conflicts in management
styles and corporate cultures, and tough problems of integration. Cost savings, expertise sharing,
and enhanced competitive capabilities may take substantially longer than expected or, worse, may
never materialize at all. Integrating the operations of two fairly large or culturally diverse
companies is hard to pull off only a few companies that use merger and acquisition strategies have
proved they can consistently make good decisions about what to leave alone and what to meld into
their own operations and systems. In the case of mergers between companies of roughly equal size,
the management groups of the two companies frequently battle over which one is going to end up
in control.

A number of previously applauded mergers/acquisitions have yet to live up to expectations—the

merger of AOL and Time Warner, the merger of Daimler Benz and Chrysler, Hewlett-Packard's
acquisition of Compaq Computer, and Ford's acquisition of Jaguar. The AOL Time Warner merger
has proved to be mostly a disaster, partly because AOL's rapid growth has evaporated, partly
because of a huge clash of corporate cultures, and partly because most of the expected benefits
have yet to materialize. Ford paid a handsome price to acquire Jaguar but has yet to make the
Jaguar brand a major factor in the luxury-car segment in competition against Mercedes, BMW,
and Lexus. Novell acquired WordPerfect for $1.7 billion in stock in 1994, but the combination
never generated enough punch to compete against Microsoft Word and Microsoft Office-Novell
sold WordPerfect to Corel for $124 million in cash and stock less than two years later. In 2001
electronics retailer Best Buy paid $685 million to acquire Musicland, a struggling 1300-store
music retailer that included stores operating under the Musicland, Sam Goody, Sun coast, Media
Play, and On Cue names. But Musicland's sales, already declining, dropped even further. In June
2003 Best Buy “sold" Musicland to a Florida investment firm. No cash changed hands and the
"buyer" received shares of stock in Best Buy in return for assuming Musicland's liabilities.

References
Thompson Jr, A. A., Strickland III, A., & Gamble , J. E. (2005). Crafting and Executing Strategy . New Delhi
: McGraw-Hill .

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