Chapter 14

Mergers and Acquisitions

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Mergers andAcquisitions Mergers & Acquisitions

Mergers and Acquisitions
Diversification strategy, either through strategic alliances or corporate diversification, can be an important source of competitive advantage. What about the performance implications of the process through which firms become diversified? Mergers and acquisitions are an important strategic option open to firms pursuing diversification strategies and have been used by numerous firms worldwide. These strategies create above-normal economic profits for the firms that pursue them.

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Barney & Hesterly

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Mergers andAcquisitions Mergers & Acquisitions

Mergers & Acquisitions Defined
Mergers
‡ two firms are combined on a relatively co-equal basis

Acquisitions
‡ one firm buys another firm

‡ the words are often used interchangeably even though they mean something very different ‡ merger sounds more amicable, less threatening
Copyright © 2008 Pearson Prentice Hall.Management & Competitive Advantage ² Strategic All rights reserved.

Barney & Hesterly

10-3 10-3

Mergers andAcquisitions Mergers & Acquisitions

Mergers & Acquisitions Defined
Mergers
‡ parent stocks are usually retired and new stock issued ‡ name may be one of the parents¶ or a combination ‡ one of the parents usually emerges as the dominant management

Acquisitions
‡ can be a controlling share, a majority, or all of the target firm¶s stock ‡ can be friendly or hostile ‡ usually done through a tender offer
Barney & Hesterly

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Barney & Hesterly 10-5 10-5 .Management & Competitive Advantage ² Strategic All rights reserved.Mergers andAcquisitions Mergers & Acquisitions Logic of Corporate Level Strategy Applies Corporate level strategy should create value: 1) such that the value of the corporate whole increases 2) such that businesses forming the corporate whole are worth more than they would be under independent ownership 3) that equity holders cannot create through portfolio investing Copyright © 2008 Pearson Prentice Hall.

Copyright © 2008 Pearson Prentice Hall. and that strategy will be economically valuable. that merger and acquisition will enable a firm to reduce its costs or increase its revenues.Management & Competitive Advantage ² Strategic All rights reserved. Barney & Hesterly 10-6 10-6 . the economic value of mergers and acquisitions depends on the market context within which they are implemented.Mergers andAcquisitions Mergers & Acquisitions Economic value of Merger and Acquisition strategies Like with the other strategies. To the extent that a merger or acquisition enables a firm to exploit competitive opportunities and neutralize threats.

Management & Competitive Advantage ² Strategic All rights reserved. Barney & Hesterly 10-7 10-7 .Mergers andAcquisitions Mergers & Acquisitions Do Mergers and Acquisitions Create Value? The Logic Unrelated M&A Activity ‡ there would be no expectation of value creation due to the lack of synergies between businesses ‡ there might be value creation due to efficiencies from an internal capital market ‡ there might be value creation due to the exploitation of a conglomerate discount ‡ a corporate raider who buys and restructures firms Copyright © 2008 Pearson Prentice Hall.

Barney & Hesterly 10-8 10-8 .Management & Competitive Advantage ² Strategic All rights reserved. and thus that unrelated diversification is not an economically viable corporate strategy. Copyright © 2008 Pearson Prentice Hall.Mergers andAcquisitions Mergers & Acquisitions Merger and Acquisition relatedness Acquisition of strategically related targets will generate only normal economic profits for both the bidding and the target firms ± this is very consistent with the discussion of economic consequences of unrelated diversification. It is argued that there is no economic justification for a corporate diversification strategy that does not build on some type of economy of scope across the businesses within which a firm operates.

the Federal Trade Commission (FTC) is charged with responsibility of evaluating the competitive implications of proposed mergers and acquisitions.Management & Competitive Advantage ² Strategic All rights reserved. FTC has developed a typology of mergers and acquisitions. FTC will disallow any acquisitions involving firms with headquarters in the US that could have the potential of generating monopoly (or oligopoly) profits in an industry. Barney & Hesterly 10-9 10-9 . each of which can be thought of as the different way in which a bidding and a target firm can be related in a merger or acquisition.Mergers andAcquisitions Mergers & Acquisitions FTC categories of mergers and acquisitions There is a wide variety of ways that bidding and target firms can be strategically related. Because mergers and acquisitions can have the effect of increasing or decreasing the level of concentration in an industry. Copyright © 2008 Pearson Prentice Hall.

Copyright © 2008 Pearson Prentice Hall. Product extension merger ± firms acquire complementary products. either backward (purchasing critical suppliers of raw materials) or forward (acquiring customers and distribution networks). as it has been known that mergers and acquisitions between strategically unrelated firms will not generate above-normal profits for either bidders or targets. Horizontal merger ± acquiring a former competitor ± the major concern for FTC as these strategies have the most direct and obvious anticompetitive implications in an industry. Conglomerate merger ± if there is no other types of links between the firms.Management & Competitive Advantage ² Strategic All rights reserved. Market extension merger ± primary objective is to gain access to a new geographic market. Conglomerate mergers are relatively uncommon.Mergers andAcquisitions Mergers & Acquisitions Main types of mergers and acquisitions The particularly important are: Vertical merger ± vertical integration. FTC defines the activity as conglomerate merger. Barney & Hesterly 10-10 10-10 . Because firms can be strategically related in multiple ways. a particular merger or acquisition can be often categorized in two or more of the FTC categories.

10-11 10-11 .Management & Competitive Advantage ² Strategic All rights reserved.Mergers andAcquisitions Mergers & Acquisitions Mergers & Acquisitions Defined Types of M&A Activity FTC Categories Vertical Related Horizontal » suppliers or customers » competitors Product Extension » complementary products Market Extension » complementary markets Unrelated Conglomerate » everything else Barney & Hesterly Copyright © 2008 Pearson Prentice Hall.

Barney & Hesterly 10-12 10-12 .Mergers andAcquisitions Mergers & Acquisitions Do Mergers and Acquisitions Create Value? The Logic Related M&A Activity ‡ value creation would be expected due to synergies between divisions ‡ economies of scale ‡ economies of scope ‡ transferring competencies ‡ sharing infrastructure. etc. Copyright © 2008 Pearson Prentice Hall.Management & Competitive Advantage ² Strategic All rights reserved.

). vertical integration. reduction in agency costs.). realization of financial opportunities (gaining access to underutilized tax shields. potential reductions in production or distribution costs (from economies of scale. and diversification economies (in portfolio management and risk reduction). pecuniary economies (market power). creation of market power and ability to eliminate inefficient management in the target firm.Management & Competitive Advantage ² Strategic All rights reserved. etc.Mergers andAcquisitions Mergers & Acquisitions Other types of mergers and acquisitions FTC categories still do not capture the full complexity of the links that might exist between bidding and target firms. Some other possible sources of strategic relatedness includes technical economies (in marketing. Copyright © 2008 Pearson Prentice Hall. production etc. avoiding bankruptcy costs). Barney & Hesterly 10-13 10-13 .

Management & Competitive Advantage ² Strategic All rights reserved. we can see who is capturing any expected value that may be created Copyright © 2008 Pearson Prentice Hall.Mergers andAcquisitions Mergers & Acquisitions Do Mergers and Acquisitions Create Value? The Empirical Evidence Research is based on stock market reaction to the announcement of M&A activity ‡ this reflects the market¶s assessment of the expected value of the merger or acquisition ‡ these studies look at what happens to the price of both the acquirer¶s stock and the target¶s stock ‡ thus. Barney & Hesterly 10-14 10-14 .

if several potential bidding firms can all obtain this value by acquiring target. the equity holders of bidding firms will. Copyright © 2008 Pearson Prentice Hall. at best.Management & Competitive Advantage ² Strategic All rights reserved. but this value will be distributed in the form of above-normal economic profits to the equity holders of acquired target firms. Barney & Hesterly 10-15 10-15 . If the economic potential of acquiring a particular target firm is widely known. earn only normal economic profits from implementing an acquisition strategy. and semi-strong capital market efficiency holds. In this setting.Mergers andAcquisitions Mergers & Acquisitions Economic profits in related acquisitions The existence of strategic relatedness between bidding and target firms is not a sufficient condition for the equity holders of bidding firms to earn above-normal economic profits from their acquisition strategies. a ³strategically related´ merger or acquisition will create economic value.

All that is required is that the different bidding firms value targets at the same level. When this is the case. does not necessarily imply that a bidding firm will be able to earn above-normal economic performance from its acquisition of a target. Also.Management & Competitive Advantage ² Strategic All rights reserved. a bidding firm may make an initial bid equal to the full value of a target and thus will be able to acquire target but will earn only normal economic profits from doing so.Mergers andAcquisitions Mergers & Acquisitions Economic profits in related acquisitions The fact that a particular target is not the object of multiple bids. Copyright © 2008 Pearson Prentice Hall. different bidding forms may have different types of strategic relatedness with target firms and these performance implications of mergers and acquisitions will still be unchanged. In anticipation of other potential bidders. bidding firms will earn normal economic profits and targets will earn above-normal profits. Barney & Hesterly 10-16 10-16 .

Management & Competitive Advantage ² Strategic All rights reserved. on average. Barney & Hesterly 10-17 10-17 . but target firms capture it Copyright © 2008 Pearson Prentice Hall. as follows: Acquiring Firms ‡ no value created Target Firms ‡ value increases by about 25% ‡ related M&A activity creates more value than unrelated M&A activity M&A activity creates value.Mergers andAcquisitions Mergers & Acquisitions Do Mergers and Acquisitions Create Value? The Empirical Evidence M&A Activity creates value.

.25 to $39.Mergers andAcquisitions Mergers & Acquisitions Do Mergers and Acquisitions Create Value? Expected versus Operational Value April 2000: Wells Fargo offers to acquire First Security Bank for about $3 billion Expected The Deal: Stock values were: Wells Fargo: $43. $65.69 First Security: $15.Management & Competitive Advantage ² Strategic All rights reserved.44 12/2000 $56.60 12/2002 $46.0 B $100.19 to $13.355 shares of WF for each share of FS stock Wells Fargo: down $0.50 .87 12/2003 $58.15 Barney & Hesterly Operational Market Cap.89 12/2004 $62.7 B $95.2 B $74.50 First Security: up $1.0 B $105.69 12/2001 $43.0 B $82.0 B 10-18 10-18 Copyright © 2008 Pearson Prentice Hall.38 Stock Price 12/1999 $40.

g. In some situations (e. can expect to generate normal economic profits from them. when stockholders face high marginal tax rates and may prefer not to take dividends) a firm may retain this free cash flow and invest it ± either in strategies that have a belownormal expected profit or in strategies that have normal expected economic profits. Barney & Hesterly 10-19 10-19 . merger and acquisition strategies are a viable option. the purpose of a merger or acquisition is to gain competitive parity and normal economic profits. Here. If all of a bidding firm¶s competitors have been able to improve their efficiency and effectiveness through a particular type of acquisition. it may still be necessary for bidding firms to engage in these activities. on average. for bidding firms. on average. Copyright © 2008 Pearson Prentice Hall.Mergers andAcquisitions Mergers & Acquisitions Why there are so many mergers and acquisitions Possible motivations to engage in mergers and acquisitions are: Ensuring survival ± even if mergers and acquisitions.Management & Competitive Advantage ² Strategic All rights reserved. then failing to make such an acquisition may put a firm at a competitive disadvantage. In this context. Free cash flows ± the amount of cash a firm has to invest after all positive NPV investments in a firm¶s ongoing business have been funded. generate only normal economic profits for bidding firms. to ensure their survival.

Mergers andAcquisitions Mergers & Acquisitions Why there are so many mergers and acquisitions Agency problems ± mergers and acquisitions benefit managers directly. Copyright © 2008 Pearson Prentice Hall. acquisitions do not generate wealth for the owners of the bidding firm. even though. as can the value of management compensation. Second. Barney & Hesterly 10-20 10-20 . managers have difficulty diversifying their human capital investments when a firm operates in narrow range of businesses. in at least two ways ± managers may use mergers and acquisitions to help diversify their human capital investments in their firms. on average. Managers who increase firm size. The size of a bidding firm can grow through merger or acquisition. As it is known. managers can reduce the probability of bankruptcy for their firm and thus partially diversify their human capital investments in their firm. independent of any value they may or may not create for a bidding firm stockholders. managers can use mergers and acquisitions to quickly increase firm size. this kind of diversification can indirectly benefit equity holders. By acquiring firms with cash flows not perfectly correlated with the cash flows of firm¶s current businesses. measured either in sales or assets. may also increase their compensation.Management & Competitive Advantage ² Strategic All rights reserved. To the extent that this diversification leads managers to make firm-specific human capital investments and to the extent that these investments can be a source of economic profits.

Barney & Hesterly 10-21 10-21 . Copyright © 2008 Pearson Prentice Hall. The existence of managerial hubris suggests that the economic value of bidding firms will fall once they announce the merger or acquisition strategy. This notion can lead bidding firms to engage in acquisition strategies even though there may not be positive economic profits from doing so.Mergers andAcquisitions Mergers & Acquisitions Why there are so many mergers and acquisitions Managerial hubris ± unrealistic belief y the managers of bidding firms. that they can manage the assets of a target firm more efficiently than can the target firm¶s current management. The potential for above-normal profits ± the final reason why managers might continue to pursue merger and acquisition strategies is the potential that these strategies offer for generating above-normal economic profits for at least some of the bidding firms.Management & Competitive Advantage ² Strategic All rights reserved.

Barney & Hesterly 10-22 10-22 . why do they continue to merge and acquire? Survival ‡ avoid competitive disadvantage ‡ avoid scale disadvantages Free Cash Flow ‡ cash generating. normal return investment Copyright © 2008 Pearson Prentice Hall.Mergers andAcquisitions Mergers & Acquisitions Why is M&A Activity So Prevalent? If managers know that acquiring firms do not capture any value from M&A¶s.Management & Competitive Advantage ² Strategic All rights reserved.

Barney & Hesterly 10-23 10-23 .Management & Competitive Advantage ² Strategic All rights reserved.Mergers andAcquisitions Mergers & Acquisitions 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? Agency Problems ‡ managers benefit from increases in size ‡ managers benefit from diversification Managerial Hubris ‡ managers believe they can beat the odds Copyright © 2008 Pearson Prentice Hall.

Mergers andAcquisitions Mergers & Acquisitions Why is M&A Activity So Prevalent? If managers know that acquiring firms do not capture any value from M&A¶s.Management & Competitive Advantage ² Strategic All rights reserved. why do they continue to merge and acquire? ‡ some M&A activity does generate above normal profits (expected and operational over the long run) Above Normal Profits ‡ proposed M&A activity may satisfy the logic of corporate level strategy ‡ managers may see economies that the market can¶t see Copyright © 2008 Pearson Prentice Hall. Barney & Hesterly 10-24 10-24 .

Mergers andAcquisitions Mergers & Acquisitions Competitive Advantage Can an M&A strategy generate sustained competitive advantage? Yes. Barney & Hesterly . if managers¶ abilities meet VRIO criteria 1 2 3 Managers may be good at recognizing & exploiting potentially value-creating economies with other firms Managers may be good at doing µdeals¶ Managers may be good at both 10-25 10-25 Copyright © 2008 Pearson Prentice Hall.Management & Competitive Advantage ² Strategic All rights reserved.

including bidders and targets. the performance of the special bidder that acquires a target firm.Mergers andAcquisitions Mergers & Acquisitions Mergers and acquisitions and sustained competitive advantage Valuable. will be greater than generally expected. and this level of performance will generate above-normal economic profits for the equity holders of the bidding firm.Management & Competitive Advantage ² Strategic All rights reserved. are aware of this additional value. rare and private economies of scope between bidding and target firms Only when the market for corporate control is imperfectly competitive might it be possible for bidding firms to earn above-normal economic profits from implementing merger and acquisition strategies. Once the target is acquired. Copyright © 2008 Pearson Prentice Hall. however. Barney & Hesterly 10-26 10-26 . An imperfectly competitive market for corporate control can exist when a target is worth more to one bidder than to others and when no other firms.

Management & Competitive Advantage ² Strategic All rights reserved. 10-27 10-27 .000 in Firm C ‡ Firm A can earn a profit of $2.000 ‡ Firm A sees value of $12.Mergers andAcquisitions Mergers & Acquisitions Competitive Advantage Recognizing and Exploiting Economies of Scope Private Economies Firm A Firm C Firm B Bidders Target ‡ Firm C¶s recognized value is $10.000 only if the economy remains private Barney & Hesterly Copyright © 2008 Pearson Prentice Hall.

Copyright © 2008 Pearson Prentice Hall. Typically. then competition in this market for corporate control will be imperfect.Management & Competitive Advantage ² Strategic All rights reserved. rare and costly to imitate economies of scope between bidding and target firms If other bidders cannot imitate one bidder¶s valuable and rare economies with targets.Mergers andAcquisitions Mergers & Acquisitions Mergers and acquisitions and sustained competitive advantage Valuable. In this case the existence of valuable and rare economies does not need to be private (although it can also be the case). bidding firms will be unable to imitate one bidder¶s valuable and rare economies of scope with targets when the strategic relatedness between them stems from some rare and costly to imitate resources and capabilities controlled by the special bidding firm. because other bidding firms cannot imitate them. Barney & Hesterly 10-28 10-28 . and the equity holders of this special bidding firm will earn economic profits.

000 profit Barney & Hesterly Copyright © 2008 Pearson Prentice Hall.Mergers andAcquisitions Mergers & Acquisitions Competitive Advantage Recognizing and Exploiting Economies of Scope Costly-to-Imitate Economies Firm A Firm C Firm B Bidders Target ‡ if the economy between A & C is costly to imitate.Management & Competitive Advantage ² Strategic All rights reserved. 10-29 10-29 . it doesn¶t matter if other firms know ‡ Firm A can still earn a $2.

Barney & Hesterly 10-30 10-30 . Copyright © 2008 Pearson Prentice Hall.Management & Competitive Advantage ² Strategic All rights reserved.Mergers andAcquisitions Mergers & Acquisitions Mergers and acquisitions and sustained competitive advantage Unexpected valuable economies of scope between bidding and target firms The discussion of above-normal profits to bidding firms implementing merger and acquisition strategies had adopted. for convenience. In these settings. involving numerous unknown and complicated relationships between firms. unexpected events after an acquisition has been completed may make an acquisition or merger more valuable than bidders and targets anticipated it would be. the strong assumption that the present value of strategic relatedness between bidders and targets is known with certainty by individual bidders. Most modern acquisitions and mergers are massively complex.

000 10-31 10-31 Copyright © 2008 Pearson Prentice Hall.000 ‡ Firm A buys Firm C for $10.000 ‡ Firm C turns out to be worth $12. .Mergers andAcquisitions Mergers & Acquisitions Competitive Advantage Recognizing and Exploiting Economies of Scope Unexpected Economies Firm A Firm C Firm B Bidders Target Barney & Hesterly ‡ Firm C has a market value of $10.Management & Competitive Advantage ² Strategic All rights reserved.

This is difficult and sometimes illegal.Mergers andAcquisitions Mergers & Acquisitions Implications for bidding firm managers The task facing managers in firms contemplating merger and acquisition strategies. If one firm knows the information about the value of the economies of scope between itself and a target and if this bidder is able to close the deal before the full value of a target is known. Keep information away from other bidders One way to avoid multiple bidders for one target is to keep information about bidding process. Copyright © 2008 Pearson Prentice Hall. The difference defines the size of the potential economic profits from an acquisition. and about underlying sources of economies of scope between a bidder and a target as private as possible.Management & Competitive Advantage ² Strategic All rights reserved. Barney & Hesterly 10-32 10-32 . then this bidding firm may earn above-normal economic profits from this acquisition. Search for rare economies of scope Managers in bidding firms need to consider not only the value of a target firm when combined with their own company. is to choose the ones that are most likely to generate above-normal returns for their equity holders. but also that value when combined with other potential bidders. most likely possible with privately held firms.

it may contact other potential bidding firms and tell them of the opportunity. This is also difficult and sometimes illegal. it is very likely to hold out for highest bid. Copyright © 2008 Pearson Prentice Hall. and limiting the amount of information that flows to the target firm may have other consequences as well. insights and perspectives before an acquisition increases the probability that economies of scope will actually be realized once the acquisition is completed.Mergers andAcquisitions Mergers & Acquisitions Implications for bidding firm managers Keep information away from targets If a target knows what it is actually worth. Barney & Hesterly 10-33 10-33 . Complete sharing of information. In fact.Management & Competitive Advantage ² Strategic All rights reserved. when some bidder has created with the lower bid than a target is actually worth.

given the emotions of intense bidding contest. Completing this type of acquisition will certainly reduce the economic performance of the bidding firm. Barney & Hesterly 10-34 10-34 .Management & Competitive Advantage ² Strategic All rights reserved. target firms can actively encourage other bidding firms to enter into the bidding process. the winning bid may actually be larger than the true value of the target. Many times. Bidding firms should generally avoid winning a bidding war ± pay a price at least equal to the full value of the target.Mergers andAcquisitions Mergers & Acquisitions Implications for bidding firm managers Avoid winning bidding wars To ensure the competitive bidding. The only time it might make sense to win a bidding war is when the winning firm possesses a rare and private or rare and costly to imitate economy of scope with a target that is more valuable than the strategic relatedness that exists between any other bidders and that target. Copyright © 2008 Pearson Prentice Hall.

Once a target has been located and valued.Mergers andAcquisitions Mergers & Acquisitions Implications for bidding firm managers Close the deal quickly Another rule of thumb to obtain superior performance from implementing merger and acquisition strategy. the less likely is the bidding firm to earn economic profits from the acquisition. it takes time for a target to recruit other bidders. The longer this period of negotiation. Barney & Hesterly 10-35 10-35 . Copyright © 2008 Pearson Prentice Hall. information leakage becomes more of a problem over time. etc. It takes time for other bidders to become aware of the economic value associated with acquiring a target.Management & Competitive Advantage ² Strategic All rights reserved. bidding firms have a strong incentive to reduce the period of time between the first bid and the completion of the deal.

These unique firms may be the only ones to understand the full value of the acquisition opportunities in this market.Mergers andAcquisitions Mergers & Acquisitions Implications for bidding firm managers Complete acquisition in ³thinly traded´ markets In general. many are sole proprietorship. Copyright © 2008 Pearson Prentice Hall. Most of these firms are privately held. Consolidation is possible through merger and acquisition strategy. as one local small firm competes with other local small firms for a common group of geographically defined customers. and as long as the number of firms implementing this consolidation strategy is small. where information about opportunities in the market is not widely known. Barney & Hesterly 10-36 10-36 . In thinly trade markets only one (or a few) firms are implementing acquisition strategies. then the market for corporate control is probably less than perfectly competitive. thinly traded acquisition and merger markets are highly fragmented. and where interests besides purely maximizing the value of a firm can be important. In general. and opportunities for above-normal economic profits may be possible.Management & Competitive Advantage ² Strategic All rights reserved. a ³thinly traded´ market is where there are only a small number of buyers and sellers. competition occurs at local level.

Barney & Hesterly 10-37 10-37 .Management & Competitive Advantage ² Strategic All rights reserved.Mergers andAcquisitions Mergers & Acquisitions Competitive Advantage Doing the Deal Search for Rare Economies Seek Thinly Traded Markets Close the Deal Quickly Bidding Firm¶s Perspective Limit Information to Other Bidders Limit Information to the Target Avoid Bidding Wars Copyright © 2008 Pearson Prentice Hall.

Barney & Hesterly 10-38 10-38 .Management & Competitive Advantage ² Strategic All rights reserved.Mergers andAcquisitions Mergers & Acquisitions Competitive Advantage Doing the Deal Seek Information from Bidders Target Firm¶s Perspective Invite Other Bidders to Join in Bidding Contest Delay. But Do Not Stop the Acquisition Copyright © 2008 Pearson Prentice Hall.

what is not as well known is that target firms must also inform themselves about the resources and capabilities of current and potential bidders ± in this way they can become fully aware of the value that they hold for bidders. to ensure that the owners of target firms appropriate whatever value is created by a merger or acquisition. and they are more likely to extract this full value in the acquisition process.Management & Competitive Advantage ² Strategic All rights reserved. However. Copyright © 2008 Pearson Prentice Hall. Barney & Hesterly 10-39 10-39 . Seek information from the bidders It is well known that bidding firms must fully inform themselves about the resources and capabilities of potential acquisition targets to ensure that they price those targets appropriately.Mergers andAcquisitions Mergers & Acquisitions Implications for target firm managers Target firm managers can counter the efforts of bidding firms to maximize the probability of earning economic profits from their merger and acquisition strategies.

Copyright © 2008 Pearson Prentice Hall. Thus the target firm increases the competitiveness of the market for corporate control and the probability that the value by an acquisition will be fully captured by the target firm.Management & Competitive Advantage ² Strategic All rights reserved. Barney & Hesterly 10-40 10-40 .Mergers andAcquisitions Mergers & Acquisitions Implications for target firm managers Invite other bidders to join the bidding competition Once a target is fully aware of the nature and value of economies of scope that exist between it and current bidding firms. it can exploit this information by seeking other firms that may have the same relationship with it and then informing these firms of a potential acquisition opportunity.

not to stop the acquisition. Copyright © 2008 Pearson Prentice Hall. Responses that reduce the wealth of target firm¶s equity holders Anti-takeover actions include: ‡Greenmail ± a maneuver in which target firm¶s management purchases any of the target firm¶s stock owned by a bidder. Greenmail effectively ends a bidding firm¶s effort to acquire a particular target.Mergers andAcquisitions Mergers & Acquisitions Implications for target firm managers Delay but do not stop the acquisition To increase the probability of receiving more than one bid. in a way that can greatly reduce the wealth of a target firm¶s equity holders. Not only they do not appropriate any economic value that could have been created if the acquisition had been completed. for a price greater than current market value of that stock.Management & Competitive Advantage ² Strategic All rights reserved. but also they have to bear the cost of the premium price that management pays to buy its stock back from the bidding firm. others have no impact on it. target firms have a strong incentive to delay an acquisition ± to create more competitive market for corporate control. Barney & Hesterly 10-41 10-41 . Some of these actions have the effect of reducing the wealth of target firm equity holders and some increase this wealth.

This cash dividend increases the cost of acquiring the target and discourage otherwise interested bidding firms from attempting to acquire the target. Barney & Hesterly 10-42 10-42 .g. thus reducing the number of bidders that might have become involved in future acquisition efforts. at very low prices.Management & Competitive Advantage ² Strategic All rights reserved. Another ³poison pill´ tactic substitutes the distribution of additional shares of firm¶s stock. Standstill agreements reduce the economic value of the target firm. for the special cash dividend. E. therefore. increasing the cost of acquisition. ‡³Poison pills´ ± variety of actions that target firm managers can take to make the acquisition of the target prohibitively expensive. the equity holders lose the value they could have appropriated if the acquisition had been completed and some of the future value. it will distribute a special cash dividend to stockholders. a target firm issues rights to its current stockholders indicating that if the firm is acquired in an unfriendly takeover.Mergers andAcquisitions Mergers & Acquisitions Implications for target firm managers ‡Standstill agreements ± are often negotiated in conjunction with greenmail ± a contract between a target and a bidding firm wherein the bidding firm agrees not to attempt to take over the target in some period of time. Copyright © 2008 Pearson Prentice Hall.

g.Management & Competitive Advantage ² Strategic All rights reserved. To prevent an acquisition. ‡Lawsuits ± against bidding firms. ‡Pac Mac defense ± targets acquire the bidding firms. either directly to the bidding firm. the bidder is likely to be less interested in acquiring the target.Mergers andAcquisitions Mergers & Acquisitions Implications for target firm managers ‡Tender offers ± Direct offers to stockholders of a target firm by a bidding firm . Barney & Hesterly 10-43 10-43 . least effective delay strategies. a target firm can sell off these crown jewels. Copyright © 2008 Pearson Prentice Hall.if a bidding firm and a target firm are strategically related. Responses that do not affect the wealth of target firm¶s equity holders Delay responses include: ‡Shark repellents ± relatively minor corporate governance changes supposed to make it more difficult to acquire a target firm ± e. the value that can be created in an acquisition can be substantial. ‡Crown jewel sale ± sometimes a bidding firm is interested in just a few of the businesses currently owned by a target firm ± ³crown jewels´. In this way. supermajority voting rules (more than 50% of target firm¶s board of directors must approve a takeover). and most of this value will be appropriated by the stockholders of the target firm. or set up a separate company to own them.

As the number of bidders increases the competition. In this sense. Copyright © 2008 Pearson Prentice Hall.Mergers andAcquisitions Mergers & Acquisitions Implications for target firm managers Responses that increase the wealth of target firm¶s equity holders Delay actions include: ‡Search for white knight ± another bidding firm that agrees to acquire a particular target in the place of original bidding firm ± may be another firm possesses more valuable economies of scope with a target firm. These cash payments appear to be very large. ‡Auction ± among bidding firms organized by a target. Barney & Hesterly 10-44 10-44 . golden parachutes are a small price to pay to give a potential target firm¶s managers incentives not to stand in the way of completing a takeover of their firm. reducing the agency problems by aligning the interests of firm¶s managers and its equity holders. ‡Golden parachutes ± compensation arrangements between a firm and its senior management team that promises these individuals a substantial cash payment if their firm is acquired and they lose their jobs in the process. or this firm may have a longer-term view in managing a target firm¶s assets than other bidding firms. the likelihood that the equity holders of the target firm appropriate all the value created by an acquisition also increases.Management & Competitive Advantage ² Strategic All rights reserved. but are actually quite small compared to the total value that can be created if a merger or acquisition is completed.

Control.Management & Competitive Advantage ² Strategic All rights reserved. and Compensation M&A activity requires responses to these issues: ‡ m-form structure is typically used ‡ management controls & compensation policies are similar to those used in diversification strategies Managers must decide on the level of integration: ‡ target firm may remain somewhat autonomous ‡ target firm may be completely integrated Copyright © 2008 Pearson Prentice Hall. Barney & Hesterly 10-45 10-45 .Mergers andAcquisitions Mergers & Acquisitions Implementation Issues Structure.

Management & Competitive Advantage ² Strategic All rights reserved. Integrating the firms may require resolution of numerous differences. functional. human resources practices. the merged organizations must be properly organized ± at least some coordination must exist. Copyright © 2008 Pearson Prentice Hall. it can also be a source of value and opportunity. Given that most merger and acquisition strategies are used to create corporate diversification strategies. the same organizational approaches (M-form structure and management compensation policies) apply. cultural differences between merged firms.Mergers andAcquisitions Mergers & Acquisitions Organizing to implement a merger or acquisition To realize the full value of any strategic relatedness between a bidding and a target firm. Barney & Hesterly 10-46 10-46 . strategic. Active management of linkages between the merged firms is required. Special problems reflect operational. Although organizing to implement mergers and acquisitions can be a source of significant cost. These firms may also have different computer telephone systems. technology differences.

Management & Competitive Advantage ² Strategic All rights reserved. often unanticipated ‡ the ability to integrate efficiently may be a source of competitive advantage Copyright © 2008 Pearson Prentice Hall. Barney & Hesterly 10-47 10-47 .Mergers andAcquisitions Mergers & Acquisitions Implementation Issues Cultural Differences ‡ high levels of integration require greater cultural blending ‡ cultural blending may be a matter of: ‡ combining elements of both cultures ‡ essentially replacing one culture with the other ‡ integration may be very costly.

Management & Competitive Advantage ² Strategic All rights reserved.Mergers andAcquisitions Mergers & Acquisitions International Issues Cultural Issues Individualism Social Orientation Power Orientation Uncertainty Orientation Goal Orientation Time Orientation Barney & Hesterly Collectivism Respect Tolerance Acceptance Avoidance Aggressive Passive Long-term Short-term (Hofstede. 1980) 10-48 10-48 Copyright © 2008 Pearson Prentice Hall. .

Barney & Hesterly 10-49 10-49 .Management & Competitive Advantage ² Strategic All rights reserved. but target firms usually capture that value M&A activity can create value over the long term for the acquiring firm Copyright © 2008 Pearson Prentice Hall.Mergers andAcquisitions Mergers & Acquisitions Summary M&A activity is a mode of entry for vertical integration and diversification strategies A firm¶s M&A strategy should satisfy the logic of corporate level strategy M&A activity can create economic value at announcement.