Entry mode 3: M & A

International Business

Topics
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Reasons for M&A
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Examples of M&A
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Importance of economies of scale in M&A

Definitions
● Merger: Two companies joining to become one
– Often by exchanging shares
● Acquisition: One company buying another
– Paying with cash, shares, or a combination
●
Megamerger: A merger between giants
– Example: Exxon and Mobile
 Activity Unstated reasons:
Higher top-line growth
● Create list of reasons to merge two firms Hide declining sales
Take adv of high stock price
●
Consider both stated and unstated reasons Bragging rights
Market trend

Famous M&A
●
Facebook bought Instagram, WhatsApp
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Amazon bought Wholefoods
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AT&T bought Time Warner
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Disney bought Pixar
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Exxon merged with Mobile
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Kraft Foods merged with Heinz.

Belief
● Maybe believe that industries are consolidating
– Data shows they are not
● Many believe that bigger firms have more profit
– This can be true but is not guaranteed
●
Many believe that bigger is always better.
 Industries Low economics of scale
● Name 3 industries with high economies of scale Art/Education/Healthcare,...
●
Name 3 industries with low economies of scale

Activity HIdden cost:

●
Identify the costs associated with M&A Added complexity (take time for decision);
Added conflict
●
Some of these might be hidden costs. Culture shock/clash

Benefits of exploring M&A (1)

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Forces managers to think about industry future
– How will things develop from here?
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Compare concentration, average margins, etc
– If industry concentrates, or not
●
Consider alternatives to consolidation
– New entrants, breakups, alliances, etc.
– This gets complicated as number of alternatives
multiply.
 Benefits of exploring M&A (2)
● Go through analysis several times
●
What will it cost you to correct (if you are wrong)
●
How can you increase flexibility
– And how much will that cost you ?
●
Can you influence probabilities with your choices
– If you acquire a firm, will this change the chance
others will also?

Alternatives to M&A (1)

●
Pickup the scraps
– M&A causes firms to sell some pieces (buy cheap)
●
Stay home
– Dominate one market (big fish, small pond)
●
Keep your eye on the ball
– While others distracted with M&A, you attack market.

Alternatives to M&A (2)

●
Make friends
– Alliances might be better solution
●
Appeal to referee (tell mom)
– Pressure regulators to investigate legality of deals
●
Stalk your target
– Let first mover do the heavy (expensive) work
●
Sell out
– Maybe better for shareholders to sell your firm.
 Activity
Summarize what you learned today.
●
Was this session worth your time?
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What helped you learn the most?
●
What did you learn about how you learn?

Review
Key Points:
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Not all M&A creates value
●
There are alternatives to M&A
●
M&A really makes sense when economies of
scale are high.

References
●
Ghemawat & Ghadar (2000) The Dubious Logic of Global Megamergers,
https://hbr.org/2000/07/the-dubious-logic-of-global-megamergers
●
Datta & Puia (1995) Cross-border acquisitions: An examination of the
influence of relatedness and cultural fit on shareholder value creation in US
acquiring firms,
https://www.researchgate.net/publication/264790190_Cross-
border_acquisitions_An_examination_of_the_influence_of_relatedness_an
d_cultural_fit_on_shareholder_value_creation_in_US_acquiring_firms
●
Meckl & Rohrle (2016) Do M&A deals create or destroy value? A meta-
analysis,
https://www.researchgate.net/publication/322217484_Do_MA_deals_creat
e_or_destroy_value_A_meta-analysis