Diversification and Acquisitions

Prof. Markus Pudelko

Outline

1. Diversification
• Product diversification
• Geographic diversification
• Expanding the vertical scope of the firm
• Benefits and drawbacks of vertical integration
• Vertical integration versus outsourcing

2. Acquisitions
• Cross-border M&As
• Motives behind M&As
• Symptoms of M&A failure

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Case study

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The scope of the firm

• Product scope

• Geographic scope

• Vertical scope

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Product diversification

Product-unrelated
Product-related
diversification
diversification
(conglomeration)
Synergy Operational synergy Financial synergy
Economies Economies of scale Economies of scope
Control emphasis Strategic (behavior) Financial (output) control
control
Organizational Centralization Decentralization
structure
Organizational Cooperative Competitive
culture
Information Intensive, rich Less intensive
processing communication communication

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Product diversification and firm performance

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Geographic diversification

International diversification

Limited international scope:

• Geographically and culturally adjacent countries

Extensive international scope:

• Beyond geographically and culturally neighboring countries

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Geographic diversification and firm performance

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Combining product and geographic diversification
Product scope

Multinational Far-flung
replicator conglomerate Extensive

Geographic
scope
Anchored Classic
replicator conglomerate Limited

Related Unrelated
Entertain both dimensions of diversification simultaneously
Migrate from one cell to another strategically

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Case study: Google

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Google’s product portfolio

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Case study: Google

Mission statement:
“to organize the world’s information and make it
universally accessible and useful.”

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Google’s diversification

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Expanding the vertical scope of the firm

[B] Several V1
[A] Single V1
Specialized
Integrated V2 Firms Linked V2
Firm
V3 by Markets
V3

• In situation [A] the value chain activities 1, 2 & 3 are integrated within
a single firm.
• In situation [B] they are performed by independent firms linked by
markets.

Which situation is more efficient?

This depends upon whether the administrative costs of the
integrated firm are less than the transaction costs of markets

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Benefits of vertical integration

• Technical economies from integrating processes e.g. iron and steel

production (but that doesn’t necessarily require common
ownership)

• Avoids transactions costs of market contracts in situations where

there are:
- a small numbers of firms
- transaction-specific investments
- Opportunism
- taxes and regulations on market transactions

• Superior coordination

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Drawbacks of vertical integration

• Differences in optimal scale of operation between different stages

of production: prevents balanced vertical integration

• Inhibits development of distinctive capabilities

• Difficulties of managing strategically different businesses

• Incentive problems: lack of “high-powered” incentives

• Limits flexibility
- in responding to demand fluctuations
- in responding to changes in technology, customer preferences,
etc.

• Compounding of risk

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When is vertical integration more attractive than
outsourcing?
How many firms are available to The fewer the companies,
transact with? the more attractive is VI

Is transaction-specific If yes, VI more attractive

investment needed?

Does limited information permit VI can limit opportunism

cheating?

Are taxes or regulation imposed VI can avoid them

on transactions?

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When is vertical integration more attractive than
outsourcing?
Do the different stages have similar The greater the similarity, the
optimal scales of operation? more attractive is VI

Are the two stages strategically similar? Strategic similarity favors VI

Is continued investment required in each Investment needs favor VI

activity?

Is entrepreneurial initiative required? If so, VI may blunt high-powered

profit incentives

How uncertain is market demand? The greater the unpredictability,

the more costly is VI

Are risks compounded by linkages VI increases risk.

between vertical stages?

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Acquisitions

Setting the terms straight

• Acquisition

• Merger

• Cross-border M&A, three primary categories: horizontal, vertical,

conglomerate

• Friendly and hostile M&A

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 Cross-border mergers and acquisitions

Consolidation
(equal mergers)
Mergers
(about 3% of all
M&As) Statutory
merger (only one
firm survives)
Cross-border
M&As
Acquisition of a
foreign affiliate Acquisition of a
Acquisitions
(97% of M&A cases)
private local
Acquisition of a firm
local firm
Privatization
(acquisition of a
public enterprise)

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Top-20 mergers and acquisitions of the 21st century
Year Purchaser Purchased Value ($billion)
1999 Vodafone Group Mannesmann 202,0
2000 AOL Inc. Time Warner 165,0
2013 Verizon Communications Verizon Wireless 130,0
2015 Dow Chemical DuPont 130,0
2015 Anheuse-Busch InBev SAB Miller 130,0
1999 Pfizer Warner-Lambert 111,8
2016 AT&T Inc. Time Warner 108,7
2015 Heinz Kraft 100,0
2007 RFS Holdings BV ABN Amro BV 98,0
2016 Linde AG Praxair 80,0
2015 Charter Communications Time Warner Cable 78,7
1998 Exxon Mobil 77,2
2000 Glaxo Wellcome Plc. SmithKline Beecham Plc. 76,0
2004 Royal Dutch Petroleum "Shell" Transport&Trading Co. 75,0
2006 AT&T Inc. BellSouth Corporation 73,0
1998 Citicorp Travelers Group 73,0
2001 Comcast Corporation AT&T Broadband 72,0
2015 Actavis Allergan, Inc. 70,5
2015 Royal Dutch Shell BG Group 70,0
2017 CVS Health Aetna 70,0

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Emerging-market corporations
acquiring Western companies

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 Motives behind mergers and acquisitions

Industry-based
Resource-based issues Institution-based issues
issues

− Enhance and
− Leverage superior − Respond to formal
consolidate market
managerial capabilities institutional constraints
power
Synergistic − Access to complementary and transitions
− Overcome entry
motives resources − Take advantage of
barriers
− Learning and developing market opening and
− Reduce risk
new skills globalization
− Scope economies

Hubris − Herd behavior-following

− Managers’ overconfidence
motives norms and chasing fads
in their capabilities
of M&As

− Self-interested actions
Managerial
such as empire-building
motives
guided by informal
norms and cognitions

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Symptoms of M&A failure
Problems for all M&As
Pre-acquisition: − Managers overestimate
Overpayment their ability to create value
for targets − Inadequate pre-
acquisition screening
− Poor strategic fit
Post-acquisition: − Poor organizational fit
Failure in − Failure to address
integration multiple stakeholder
groups’ concerns
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Particular problems for
cross-border M&As
− Lack of familiarity with foreign
cultures, institutions, and
business systems
− Inadequate number of worthy
targets
− Nationalistic concerns against
foreign takeovers (political and
media levels)
− Clashes of organizational
cultures compounded by
clashes of national cultures
− Nationalistic concerns against
foreign takeovers (firm and
employee levels)
 Stakeholders‘ concerns during M&A

Will efficiency and

Will synergy benefits Optimistic view of
Investors be downscaled? ROI?
short-term revenues
fall?

Internal conflicts:
Synergies difficult to
Top management attain
fractious managem. Unrealistic euphoria
groups, key staff leave

Expected to do M&A
Middle Concers over job Overwhelmed by scale
and day jobs at the
management security and scope
same time

Who is setting my
Front-line What should I tell my When will lay-offs
priorities and
employees customers? begin?
objectives?

Customers Service quality dips, No one is listening to

So what?
relationship suffers me. Do I still matter?

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Sample exam question

Which synergistic motives may drive mergers and acquisitions?

Please mention five points and explain them briefly. (5 Points)

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Sample exam question

Which synergistic motives may drive mergers and acquisitions?

Please mention five points and explain them briefly. (5 Points)
From an industry-based perspective, a merger or acquisition can have
synergistic effects, if it allows the acquirer or merger partners to enhance and
consolidate their market power. It can also increase efficiency through scope
economies.

A resource-based consideration would be the aim to improve an acquisition

target’s performance by leveraging the acquirer’s superior managerial
capabilities. A merger or acquisition can also give access to complementary
resources.

Considering the institutional environment, large multinationals often acquire

their smaller joint venture partners as soon as an opening of the target market
allows them to do so.

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 Thank you.
Contact:
Department of International Business
Melanchthonstrasse 30
72074 Tübingen · Germany
Phone: +49 7071 29-78179
global-strategy@wiwi.uni-tuebingen.de

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