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Logic of Corporate Level Strategy Applies

The Strategic Management Process
External
Corporate level strategy should create value:
Analysis
1) such that the value of the corporate whole increases
Strategic Strategy Competitive
Mission Objectives Choice Implementation Advantage

Which Businesses 2) such that businesses forming the corporate whole

Internal to Enter? are worth more than they would be under
Analysis
• Vertical Integration independent ownership
Corporate Level
Strategy • Diversification
Mode of Entry?
• Strategic Alliances 3) that equity holders cannot create through
• Mergers & portfolio investing
Acquisitions
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Mergers and Acquisitions Defined Mergers and Acquisitions Defined

Mergers Acquisitions Mergers Acquisitions

• two firms are combined on • one firm buys another • parent stocks are usually • can be a controlling
a relatively co-equal basis firm retired and new stock issued share, a majority, or
all of the target firm’s
• name may be one of the stock
• the words are often used interchangeably even parents’ or a combination • can be friendly or
though they mean something very different
• one of the parents usually hostile
• merger sounds more amicable, less threatening emerges as the dominant • usually done through
management a tender offer
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Mergers and Acquisitions Defined Do Mergers and Acquisitions Create Value?

The Logic
Types of M&A Activity
Related M&A Activity
FTC
Categories • value creation would be expected due to
synergies between divisions
Vertical » suppliers or customers
• economies of scale
Horizontal » competitors
Related • economies of scope
Product Extension » complementary products
• transferring competencies
Market Extension » complementary markets
• sharing infrastructure, and so on
Unrelated Conglomerate » everything else

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Do Mergers and Acquisitions Create Value? Do Mergers and Acquisitions Create Value?
The Logic The Empirical Evidence

Unrelated M&A Activity Research is based on stock market reaction to the

announcement of M&A activity
• there would be no expectation of value creation
due to the lack of synergies between businesses • this reflects the market’s assessment of the
expected value of the merger or acquisition
• there might be value creation due to efficiencies
from an internal capital market • these studies look at what happens to the price
• there might be value creation due to the exploitation of both the acquirer’s stock and the target’s stock
of a conglomerate discount • thus, we can see who is capturing any expected
• a corporate raider who buys and restructures firms value that may be created

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Do Mergers and Acquisitions Create Value? Are Mergers Successful?

The Empirical Evidence • Evidence from Shareholder Returns:
– Small increase in the combined value of the 2 companies involved
M&A Activity creates value, on average, as follows: – Gains flow (almost) entirely to shareholders of acquired companies
– Returns to shareholders of acquiring companies negative on
average
Acquiring Target
Firms Firms • Evidence from Accounting Profits
– Diverse findings: “…the results from these accounting-based
studies are all over the map”

• no value created • value increases by – Key problem: separating the effects of the merger from the many
other factors that influence firms’ profitability
about 25%
• Diversity of M&A
• related M&A activity creates more value than
– Lack of consistent findings reflects the vast diversity in types of
unrelated M&A activity mergers and characteristics of the firms involved
– Even when mergers categorized (e.g. horizontal, vertical,
M&A activity creates value, but target firms capture it. conglomerate) no consistent performance differences

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The Value of M&A Deals Worldwide, 1995-2014 Why Is M&A Activity So Prevalent?
If managers know that acquiring firms do not
capture any value from M&A’s, why do they
continue to merge and acquire?
$ bn.

• avoid competitive disadvantage

Survival
• avoid scale disadvantages

Free Cash • cash generating, normal return investment

Flow

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Why Is M&A Activity So Prevalent? Why Is M&A Activity So Prevalent?

If managers know that acquiring firms do not If managers know that acquiring firms do not
capture any value from M&A’s, why do they capture any value from M&A’s, why do they
continue to merge and acquire? continue to merge and acquire?

• Some M&A activity does generate

Agency • Managers benefit from increases in size.
above normal profits (expected and
Problems • Managers benefit from diversification. operational over the long run).
Above Normal • Proposed M&A activity may satisfy
Profits the logic of corporate level strategy.
Managerial • Managers may see economies that
• Managers believe they can beat the odds.
Hubris the market can’t see.

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Motives for Mergers and Acquisitions Competitive Advantage

q Managerial Motives
– Top management remuneration depends more on firm size than profitability Doing the Deal
– Psychological rewards--M&As project power, confer CEO celebrity status Search for
– Imitation: the fear of not participating in an industry’s merger wave Rare Economies
q Financial Motives
– Stock market inefficiencies—acquire undervalued companies (Berkshire Seek Thinly Limit Information
Hathaway-Heinz): use overvalued equity to acquire (AOL-Time Warner)
Traded Markets to Other Bidders
– Quest for tax savings—cross-border acquisitions to relocate to lower tax
regime (Burger King-Tim Horton) Bidding Firm’s
– Financial re-engineering: debt-financed acquisitions that reduce the
Close the Perspective
acquired company’s cost of capital (KKR-RJR Nabisco) Limit Information
q Strategic Motives Deal Quickly to the Target
– Horizontal M&A—economies of scale and market power (Sirius-XM)
– Geographical extension M&A—to enter overseas market (ENEL-Endesa)
– Vertical M&A—to acquire supplier or customer (Gencore-Xstrata)
Avoid Bidding
– Diversifying M&A—to enter a new area of business (Kering-Puma) Wars

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Competitive Advantage Terminology

Doing the Deal
Seek Information • Black Knight: A black knight is a company that makes an
from Bidders unwelcome, hostile takeover bid.
• White Knight: They are the ones tasked with potentially rescuing
the target from the clutches of another prospective buyer with intentions
Invite Other Bidders to to bleed it dry to make a quick profit.
Target Firm’s
Perspective Join in Bidding Contest • PacMan Defence: The target firm then tries to acquire the company that
has made a hostile takeover attempt
• Poison Pill: A defense strategy used by the directors of a public company
Delay, But Do Not to prevent activist investors, competitors, or other would-be acquirers
Stop the Acquisition
from taking control of the company by buying up large amounts of its
stock.
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Implementation Issues Implementation Issues

Structure, Control, and Compensation Cultural Differences
M&A activity requires responses to these issues: • High levels of integration require greater cultural
blending.
• M-form structure is typically used.
• Cultural blending may be a matter of:
• Management controls and compensation policies
• combining elements of both cultures
are similar to those used in diversification strategies.
• essentially replacing one culture with the other
Managers must decide on the level of integration: • Integration may be very costly, often unanticipated.

• Target firm may remain somewhat autonomous. • The ability to integrate efficiently may be a source
of competitive advantage.
• Target firm may be completely integrated.
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Managing Mergers and Acquisitions Summary

q Challenges of Pre-merger Planning M&A activity is a mode of entry for vertical

– Careful identification of the goals of M&A integration and diversification strategies.
– Difficulties in estimating the benefits of M&A: on average cost savings
overestimated by 25%, revenue increases by 70%
A firm’s M&A strategy should satisfy the
q Challenges of Post-Merger integration logic of corporate level strategy.
– Problems of integration: incompatible management systems; clash of
cultures; adjustment difficulties by employees of acquired company

– Building acquisition capability—managing the learning process to

M&A activity can create economic value at
ensure that acquisition experience builds capability announcement, but target firms usually capture
– Marching post-merger management to the strategic goals of the that value.
merger: leveraging the firm’s existing business model (e.g. Walt
Disney and Pixar) vs. reinventing the business model (e.g. HP and
Autonomy) M&A activity can create value over the long term
for the acquiring firm.
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