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M&A: Strategic Perspective

IIFT, June, 2016

Mergers & Acquisitions

M&A = Two firms are combined to achieve certain business


and/or strategic objectives (Sundarsanam, 2001)

M&A are of a great significance to

Success/Failure of M&A affects both lenders and


shareholders

Firms themselves
Workers, Managers, Competitors, Capital Providers, Economy

Financial risk because of imprudent decisions by the companies


merging

Indirect Losses

Job losses
Terminated economic activities
Future losses?

Important Issues

What is the motivation behind M&As?

Are there any specific characteristics of firms


engaged in M&A?

Why some firms prefer an inorganic growth over


organic growth?

Which types of firms engage target others?


Which types of firms are targeted by others?
Why would some firms divest a part of business?

Is M&A dependent on Macroeconomic condition?

Are there certain periods where we find flurry of M&As?


If Yes, why? What are the characteristics of such
periods?

Determinants of a Firms Success


Objectives
Articulation
&
Communicat
ion
Direction
Shaping
Internal
Actions
Plan for
Brilliant
Recovery

The Logical Route

Is there a Need for Strategic Vision

Is OUR existence threatened?


Are WE losing out to Competitors?
Are WE falling behind time?
Are OUR customers and stakeholders unsatisfied?
Are WE performing below our potential?
Are WE prepared for the Change in the Environment?
Is there a scope for performing better?
Do WE want to achieve the global standards?
Can WE withstand the pressures exerted on US?
Are there new opportunities?
Without a strategic vision, are WE going to go berserk?

Strategic Vision: Examples


Microsoft
A Computer on every desk and in every home using great
software as an empowering tool
Empower people through great software anytime, any
place and on any device
Can Strategic Vision determine M&A activities?
Your examples & Your Discussions!

Competitive Advantage

Porter (1980, 1985): Inhibitors of Competitive


Advantage
Substitut
es

Rivals

New
Entrant
s

Firm
Custome
rs

Supplie
rs

Economy, Technology, Social Lifestyle, Values,


Demography, Legislations

Response?

Cost Leadership

Differentiation

Maximize Customer Service Outputs


Product and Process Differentiation
High Price Low Volume Game

Focus

Rationalize cost across value chain


Visible and Invisible Costs
Low Price High Volume Game

Cost Focus: Extreme form of cost leadership targeted at niches


Differentiation focus: Extreme form differentiation, targeted at
niches

How can M&A help in these? Your examples and


explanations

Product-Market Matrix
Product Present

Related

Unrelated

Market
Present

Risk (-)

Risk (+)

Risk (+)

Risk (++)

Related

Unrelated

Product-Market Matrix

Stay Close to Home? or Go Far or Go Far Off?

What if the prospects of growth is limited in the present market-present product


situation?

Limited scope of differentiation!


Limited scope of cost leadership!

Does a niche appear in the furthest corner (lower right)?

Industry may have excess capacity!


Market may be saturated!
Market may be fragmented!

Present Product

What are the enablers? What are the barriers?


How can barriers be busted?

Chance of Cost Focus?


Chance of Differentiation Focus?

Does a Blue Ocean exist in the furthest corners (along the left-to-right diagonal)?

Blue Ocean Strategy (Kim & Mauborgne, 2005)

Technology: The 3rd Dimension?

How can M&A help? Your examples and your discussions!

BCG Matrix
High

Low

High

Stars Profitability
++
(Retain Probably,
Yes!)

Question Marks
(Explore new
Markets through
M&A? Disinvest?)

Low

Cash Cows
(Explore new
Markets? M&A?)

Dogs (Disinvest?)

Market Share

Market Growth Rate

The GE 3-Circle Vision (Jack Welchs


Version)

GE 3-Circle Vision

Socio-Technical Transitions (MLP)

Geels (2002); Geels & Schot (2007)

Socio-Technical Transitions

Transitions

A Novel and Transformative change in the Socio-Technical


Configuration

3 Distinct Layers

Micro-level (Niche): Novel technologies evolving in patches

Meso-level (Regime): Incumbent and dominant rules and


routines embossed in the minds and habits of producers,
consumers and regulators

Some technologies are related (Electric Vehicles, Lithium Ion Batteries,


Solar Chargers
Some niches may be at conflict at each other

Niches challenge the regime

Macro-level (Landscape): Exogenous factors shaping the


trajectories of the niche, enforcing/weakening the regime

For example: Globalization; Climate Change Agenda, Political Changes

SNM

Why do some niches emerge faster than others?


Why do some niches lose steam and die out?
Strategic Niche Management (Geels, 2002; Raven, 2005)

Articulation of Expectations: Adequacy, aimed at all actors


Robust network of actors addressing the complete value
chain
Proper Incentive for each actor class in the network weeding
out weak links
Building Institutions design and execution, legal, regulatory
Protection Policy Support
Second Order Learning Are we doing it right? Dynamism

How can M&A help? Your examples and your


discussions!

Rationale for M&A

Strategic Rationale

Speculative Rationale

Rules of competition makes the old strategies obsolete


Target is stuck in the middle
Correction requires finances, expertise, etc.
Sell & Save

Financial Necessity Rationale

The target is a commodity Target is into novel products that has future benefits
Acquire-develop-sell
Acquire-split-sell

Management Failure Rationale

Broadening the Product-Market-Technology Portfolio


Diversification, etc.

Tax Planning Acquire a loss making entity to save on taxes


Bridging the finance-gap: Merge or acquire cash rich companies

Political Rationale

Government Policy changes

M&A: Quick Explanation

Amalgamation = Mergers, Acquisitions, Takeovers, Buyout


Sundarsanam (2001) provides some quick definitions:

Merger: Firms come together to combine and share their


resources to achieve common objectives. A new entity may/may
not be formed. Shareholders of the firms often remain the owners
of the combined entity
Acquisition: Often, an arms-length deal. One firm purchases the
shares and assets of another firm. Target becomes a subsidiary of
the acquirer
Buyout: Acquisition of a company/its part (a component
business). Acquirer is a group of investors, including specialist
private equity firms and management of the business being
bought
Takeover: Similar to acquisition. If the target firm is larger than
the acquiring firm, the acquisition is called reverse takeover or
reverse merger

M&A: Pre and Post

Pre-M&A
Should We?
(Strategy)
Why? (Strategy)
Which? (Strategy)
How Much?
(Valuation)

M&A/Takeovers
(Financial/Legal)

Post M&A
Integration (Change
Management)
Correction (Change
Management)

5-S Model

Sundarsanam, 2001

S1: How good is the Corporate Strategy?

M&A is a means the end is Sustainable


Competitive Advantage
Is the strategy of M&A in sync with the
Corporate & Business Strategy?

What changes are required in functional and


operative strategy?

How do M&A help in Cost Leadership/Product


Differentiation/Focus?

What are the strategic gains anticipated?

S2: How well does the firm organize for


M&A?

Does the firm have organizational resources


and capabilities for acquisition?

What are the capabilities for post acquisition


integration?

Does the assumption of economic rationality hold?

How to resolve conflicts?

What are the forethoughts for nurturing the


new entity?

Is their clarity?
Is their structure?

S3: What are the pitfalls in Deal


Structuring & Negotiation?

How well is the valuation of the target?

How good is the choice of advisors


investment bankers, lawyers, finance
professionals, accountants, etc.?
How well does the Bidder know the target?

How well does the acquirer plan to leverage its


own assets with the target?

Have all information been extracted?


What are the asymmetries?

How well is the Due Diligence performed?


How well are the negotiation limits
determined?

What is the acceptable price? What are the

S4: How well are post acquisition


integration measures determined?

Objective: Merged organization should deliver


strategic and value expectations (that drove
the merger process)
Maximization of the objective requires:

Change management
Communication plans
Goals
Integration of psyche (HP & Compaq)
Integration of Information Systems (Union Bank of
Switzerland and Swiss Bank Corporation)

S5: How well did the Merger go?

Post acquisition audit and organizational


learning
Each deal is Unique

Past experience about merger is irrelevant


Trail gone cold difficult to assess the
performance of the merged entity

The merged entity is a completely a new entity

Lack of emphasis on new learning

Correctional measures are delayed


Managements autocratic attitude
Brilliant recovery: a forgotten paradigm

Take Away Lessons

Change is the only constant!


Rules of Competition, Business Environment are dynamic
Internal Assets (Hard and Soft) are also dynamic

Divestiture is a strategic realignment process

A firm must continuously re-assess its position, reorganize


itself to address new challenges and opportunities
M&A is a part of this realignment process
Not necessarily management mistakes rather a strategic
choice
Cross-subsidization is reduced
Proceeds from Divestiture can be used to acquire new firms
and capabilities

M&A + Divestiture: Strategic choice to diversify markets,


products and technologies

A Few Questions

Why does a lot of M&As happen in the sectors


like PNG, Aviation, Automobiles, Telecom,
Heavy Engineering?

Are M&As always successful?

Why did HP-Compaq Merger fail?

Is Diversification of Products always a


preferred strategy?

Why do Boeing, Xerox, Coke more or less stick to


the core?

Thank You