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5391 M&A: Mergers/Acquisitions
D:/Macy Class/MGT 5391/Spring 2006/MandA
1. Why do approximately 85% of “M&A’s” fail? 2. Why are Cisco’s acquisitions’ successful? 3. How many internal groups or teams does Cisco use in their acquisitions? 4. What are the names of these Cisco groups or teams? 5. What are “Enterprise Teams”? Where are they located at?
D:/Macy Class/MGT 5391/Spring 2006/MandA
A Firm’s Internal and External Growth External Market Strategies
and Other Forces Market/Customer Insights
Corporate And Business Strategies
Value Chain: Core Competencies Identification
Increased Capabilities (Internal Growth)
Outsourcing (NonCore Competencies) M&A/JV’s (External Growth)
D:/Macy Class/MGT 5391/Spring _____ Source: Barry A. Macy, Successful Strategic Change, Berrett-Koehler Publishers, San Francisco, CA. (forthcoming)
Mergers and Acquisitions: Three Types
A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage
A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses
An acquisition where the target firm did not solicit the bid of the acquiring D:/Macy firmClass/MGT 5391/Spring 2006/MandA
Remember: Approximately 85% Of all M&A’s are FAILURES!! (Why?) D:/Macy Class/MGT 5391/Spring 2006/MandA 5 .
Strategic Alliance Model: The Five Most Frequent Types of Alliances/M&A Competitors Key Suppliers Firm Supply Chain Demand Chain Retail Store Or Large Preferred Customer Accounts Consumers D:/Macy Class/MGT 5391/Spring 2006/MandA 6 .
Question:In what world region M&A’s perform well? • North America •Asia •Europe D:/Macy Class/MGT 5391/Spring 2006/MandA 7 .
Reasons for Acquisitions Increased market power Overcome entry barriers Problems in Achieving Success Integration Difficulties/Cultures Inadequate evaluation of target Cost of new product development Increased speed to market Lower risk compared to developing new products Increased diversification Avoid excessive competition Large or extraordinary debt Acquisitions Inability to achieve synergy Too much diversification Managers overly focused on acquisitions Too D:/Macy Class/MGT 5391/Spring 2006/MandA large 8 .
S.Reasons for Acquisitions Increased Market Power Acquisition intended to reduce the competitive balance of the industry Example: British Petroleum’s acquisition of U. Amoco Overcome Barriers to Entry Acquisitions overcome costly barriers to entry which may make ―start-ups‖ economically unattractive Example: Belgian-Dutch Fortis’ acquisition of American Banker’s Insurance Group Lower Cost and Risk of New Product Development Buying established businesses reduces risk of start-up ventures D:/Macy Class/MGT 5391/Spring 2006/MandA 9 Example: Watson Pharmaceuticals’ acquisition of TheraTech .
allows market entry in a more timely fashion Example: Kraft Food’s acquisition of Boca Burger Diversification Quick way to move into businesses when firm currently lacks experience and depth in industry Example: CNET’s acquisition of mySimon Reshaping Competitive Scope Firms may use acquisitions to restrict its dependence on a single or a few products or markets Example: General Electric’s acquisition of NBC D:/Macy Class/MGT 5391/Spring 2006/MandA 10 .Reasons for Acquisitions Increased Speed to Market Closely related to Barriers to Entry.
E..) Integration Difficulties Differing financial and control systems can make integration of firms difficult Example: Intel’s acquisition of DEC’s semiconductor division D:/Macy Class/MGT 5391/Spring 2006/MandA 11 .Problems with Acquisitions Only a “financial team” assembled and they make “the decision” (should have two teams: one financial And one organizational – where the organizational Team says “Yes” or “No” (i. Cisco & G.e.
Problems with Acquisitions Inadequate Evaluation of Target ―Winners Curse‖ bid causes acquirer to overpay for firm Example: Marks and Spencer’s acquisition of Brooks Brothers Large or Extraordinary Debt Costly debt can create onerous burden on cash outflows Example: AgriBioTech’s acquisition of dozens of small seed firms D:/Macy Class/MGT 5391/Spring 2006/MandA 12 .
Problems with Acquisitions Inability to Achieve Synergy Justifying acquisitions can increase estimate of expected benefits Example: Quaker Oats and Snapple Overly Diversified Acquirer doesn’t have expertise required to manage unrelated businesses Example: GE--prior to selling businesses and refocusing Managers Overly Focused on Acquisitions Managers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategy Example: Ford and Jaguar Too Large Large bureaucracy reduces innovation and flexibility D:/Macy Class/MGT 5391/Spring 2006/MandA 13 .
Attributes of Effective Acquisitions + Complementary Assets or Resources Buying firms with assets that meet current needs to build competitiveness + Friendly Acquisitions Friendly deals make integration go more smoothly + Careful Selection Process Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies + Maintain Financial Slack Provide enough additional financial resources so that profitable projects would not be foregone D:/Macy Class/MGT 5391/Spring 2006/MandA 14 .
Attributes of Effective Acquisitions + + Low-to-Moderate Debt Merged firm maintains financial flexibility Flexibility Has experience at managing change and is flexible and adaptable + Emphasize Innovation Continue to invest in R&D as part of the firm’s overall strategy D:/Macy Class/MGT 5391/Spring 2006/MandA 15 .
/Culture assessment + Outcome: It will take 10 years for them to payback Rule of thumb = 5 years pay back D:/Macy Class/MGT 5391/Spring 2006/MandA 16 .Case Example: Sabre and Get There + Sabre paid $758M + ONLY did an “accounting/financial assessment” No Org.
M&A Summary • Current Dilemma in Creating Profitable Growth – High Failure Rate of M&A • Tempting to focus on what is wrong with M&A and pass on acquisitions • Approximately 85% of all M&A’s are failures – Organic (internal) growth is hard • Most companies have to grow externally to meet shareholder expectations. D:/Macy Class/MGT 5391/Spring 2006/MandA 17 .
M&A Summary • Questions Managers Should Ask About M&A – What are the common denominators of companies that are successful at M&A? – How do successful companies organize and approach M&A? – Are these methods transferable to other firms? D:/Macy Class/MGT 5391/Spring 2006/MandA 18 .
S.M&A Summary • Bain & Co. firms – Measured performance over 15 year period: 1968-2001 – Compared firms’ behavior across 7.476 acquisitions to the excess return they provided to shareholders D:/Macy Class/MGT 5391/Spring 2006/MandA 19 . Study – 724 publicly held U.
M&A Summary • Key Findings of Study – Bank on Experience • Frequent buyers outperform both non-buyers and infrequent buyers – Think Small • Shareholder returns are negatively correlated with deal size • Small M&A deals are most successful D:/Macy Class/MGT 5391/Spring 2006/MandA 20 .
M&A Summary • Key Findings cont’d – Don’t assume home runs • Do not put ―all of your eggs in one basket‖ by only doing a few big M&A deals – Buy in fair and foul weather • Develop a rigorous program of M&A and stick to it • Constant buyers are most successful D:/Macy Class/MGT 5391/Spring 2006/MandA 21 .
M&A Summary • Key Findings (cont’d) – Reinforce M&A commitment • Frequent buyers succeed because they are organized and have institutionalized disciplines – There is no magic in making M&A deal work • Firms that are successful at M&A make it an integral part of their strategies and support M&A just as they would any other core competency D:/Macy Class/MGT 5391/Spring 2006/MandA 22 .
ramp up • Frequent acquirers outperform other companies • Firms that focus on small deals (less than 15% of buyer size) have the highest returns • Combining deal frequency (high vs. small) forms 5 strategic approaches to M&A D:/Macy Class/MGT 5391/Spring 2006/MandA 23 . low) with deal size (big vs.M&A Summary • How to Succeed at M&A – Get in the game. start small.
M&A Summary • 5 Approaches to M&A – Mountain Climbing • Frequent acquirers that start with small deals and ramp up to larger ones – Stringing Pearls • Frequent acquirers that focus on small targets – Betting Small • Infrequent acquirers that set their sights on small targets – Rolling the Dice • Infrequent acquirers that make a few big bets – Playing Dead • Firms that do not do M&A D:/Macy Class/MGT 5391/Spring 2006/MandA 24 .
M&A Summary • 5 Approaches to M&A (cont’d) – The worst strategy is Rolling the Dice • Most firms that make a few big bets. are infrequent acquirers with no M&A experience – Like putting a teenager behind the wheel of an 18wheeler—little mistakes can be devastating – Difficult to integrate with larger targets • The best strategy is Mountain Climbing – Frequent buyers work their way up from small to large firms and gain experience on the way D:/Macy Class/MGT 5391/Spring 2006/MandA 25 .
M&A Summary • How to Succeed at M&A – Avoid Rookie Mistakes • Acquire companies that best fit your organization’s strategy – Do not buy firms just because they are available or look cheap • Consult the frontline managers – These are the people who can best assess the quality of the target and will be responsible for the new firm • Develop a planned process for M&A – Helps avoid ―deal fever‖ D:/Macy Class/MGT 5391/Spring 2006/MandA 26 .
M&A Summary • How to Succeed at M&A (cont’d) – Use Dollar Cost Averaging • Constant Buyers—buy consistently through all economic cycles • Recession Buyers—increase frequency of buying during recessions • Growth Buyers—buy mainly during economic growth • Doldrums Buyers—buy in stable periods between recession and growth D:/Macy Class/MGT 5391/Spring 2006/MandA 27 .
M&A Summary • How to Succeed at M&A – The most successful strategy is the constant buyer • These firms buy high and they buy low • Similar to the way dollar cost averaging is treated in mutual funds • Always on the hunt for deals. D:/Macy Class/MGT 5391/Spring 2006/MandA 28 .
seal the contact. and integrate the acquired company • Create a feedback loop to learn from mistakes D:/Macy Class/MGT 5391/Spring 2006/MandA 29 .M&A Summary • How to Succeed at M&A (cont’d) – Get on the Learning Curve • Start with small. low risk deals and build M&A capabilities • Institutionalize M&A processes – This helps the firm to quickly recognize strategically fit deals. evaluate them.
M&A Summary • How to Succeed at M&A – Build a Standing Deal Team • Maintain an experienced core M&A team – This team serves as a firm’s institutional memory bank as members learn lessons from each deal • Deal team members are in charge of the entire purchase—from screening to due diligence • Core deal team should stay involved in integration • Company should do post-mortem after every M&A to update deal guidelines and learn from mistakes D:/Macy Class/MGT 5391/Spring 2006/MandA 30 .
outdoor displays. and entertainment • Work with line management to look for and evaluate deals • Are in the best position to size up prospects and evaluate synergies according to central team criteria D:/Macy Class/MGT 5391/Spring 2006/MandA 31 .M&A Summary • Deal Teams at Clear Channel Communications – Clear channel has a central M&A team at its company headquarters • 3 person team that imposes clear criteria for every purchase (Problem!) – Local M&A teams in each of its three major divisions—radio.
M&A Summary • How to Succeed at M&A (cont’d) – Pull in Line Management Early and Often • These are people that will be responsible for integrating and running the acquired business D:/Macy Class/MGT 5391/Spring 2006/MandA 32 .
M&A Summary • Line Management Involvement at Washington Mutual – 6 member core deal team picks and analyzes acquisition prospects – Deal team seeks advice and help from business unit leaders who know operations best – This collaboration helps ensure that the right decisions are made at the right price – Kick starts integration • Early understanding and buy-in from business units D:/Macy Class/MGT 5391/Spring 2006/MandA 33 .
M&A Summary • How to Succeed at M&A (cont’d) – Find Ways to Kill Deal Fever • Be prepared to walk away from a bad deal • Insist on high-level management approval for all M&A • Use a compensation system to ward off illconsidered acquisitions – e. Clear Channel ties its M&A team’s pay to the contributions that acquisitions make to the firm’s financial performance • Set a walk-away price D:/Macy Class/MGT 5391/Spring 2006/MandA 34 .g.
the firm has spent $3 billion on more than 250 acquisitions. driving 40% of its topline growth – Cintas is the market leader and revenues have risen over 20% per year to $2.3 billion in 2002 D:/Macy Class/MGT 5391/Spring 2006/MandA 35 .M&A Summary • Cintas—Successful Frequent Buyer – Cintas has supplemented its internal growth with the acquisition of hundreds of companies – Over the last 5 years.
‖ D:/Macy Class/MGT 5391/Spring 2006/MandA 36 .M&A Summary • Cintas—Successful Frequent Buyer – Cintas CEO Robert Kohlepp states: ―Success depends on three things: top and line management involvement. and being willing to pass up a bad deal. institutionalizing the process of making acquisitions.
M&A Summary • Problems with Acquisitions – Only a ―financial team‖ assembled and they make ―the decision‖ • Should have two teams – One financial and one organizational—where the organizational team says ―Yes‖ or ―No‖ • A firm should maintain a core M&A team to deal with all aspects of a purchase D:/Macy Class/MGT 5391/Spring 2006/MandA 37 .
M&A Summary • Problems with Acquisitions – Integration Difficulties • Differing financial and control systems can make integration of firms difficult • ―Deal Smarts‖ authors recommend involving line management at an early stage to help with integration • Also discuss the need for an integration team to help make the transition smooth D:/Macy Class/MGT 5391/Spring 2006/MandA 38 .
M&A Summary • Problems with Acquisitions (cont’d) – Inadequate Evaluation of Target • ―Winners Curse‖ bid causes acquirer to overpay for firm • Article recommends developing a structured process for M&A and maintaining an experienced deal team in order to avoid ―deal fever‖ – Managers Overly Focused on Acquisitions • Managers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategy • This can be overcome by requiring high-level management approval for M&A and by tying compensation systems to acquisition performance D:/Macy Class/MGT 5391/Spring 2006/MandA 39 .
M&A Summary • Problems with Acquisitions – Too Large • Large bureaucracy reduces innovation and flexibility • The best strategy is mountain climbing – Start with small deals and move up to big ones • The larger the target. the more difficult it will be to integrate D:/Macy Class/MGT 5391/Spring 2006/MandA 40 .
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