M&A Capabilities

Session 14

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Acquisitions and resources

Acquire new
As implementation Constant lookout for
complete sets of
of growth plan new acquisitions
resources

Creating value of
Rapid acquisition of Anything that is
acquisitions/
resources-business available cheap
capabilities
ready

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Terms of Inter-firm activities involving resource sharing

Mergers

Takeovers

Acquisitions

Joint ventures

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 Firms attempting stretch into new business where
they are missing some key CSFs, need to find ways to
Parenting Matrix acquire these CSFs fast to make the business work

SBU Value Traps

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When does a firm acquire another
• Corporate strategy logic- when it can create more
value(high operational and corporate relatedness)
• When it requires new resources which are often
technologically and geographically bounded
• Needing ‘distant’ resources for path breaking change
• As a part of ‘borrowing’ in stretch & leverage

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Decision on acquisitions based on
• Potential for value creation- similarity, complementarity= benefits
• Reduced value due to implementation/integration- costs
• Worth of the deal = benefit- costs

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• Similarity may lead to high integration
• Economies of scale or scope
• Sharing or transfer of resources across the combined firm
• Firms possess sufficient knowledge to implement integration

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 Costs of integration- reduces potential
value
• Costs of integration-
• organizational differences,
• Structure, procedural differences, Systems
• Culture

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Acquiring Strategic factors
• Firms may need to be acquired to acquire strategic factors
• A firm with superior information in the form of more accurate
expectations of the value of resources can identify opportunities to
acquire underpriced resources and avoid overpriced ones.
• Firms with different complementary resources potentially may value
a resource differently and thus be willing to pay different amounts to
buy the same resource about which they have the same information.
Firms can “build to buy” and position themselves for SFM activity
through management of their complementary resource stocks.

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 Acquisition based capabilities- related to

• Selection of acquisitions as a mode of growth

• Identification of targets= what is a heartland business for the firm
• Screening of targets and deal making
• Reconfiguration

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Capabilites - selection
• Appropriate mode- when the type of
competence required
• Has no link with the current resource base
• Market failure in discrete resource exchanges
• In utilizing- multiple points of contact with the other firm
are needed
• High risks of integration
• Hence often last choice- unless rapid growth is needed

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Capabilities-identification of targets
• Identifying range of targets from which acquisitions can be made
• Mechanisms/thumbrules/procesesses for identifying targets
• Ability to analyse own resource base and identifying resource
gaps/complementarities

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Screening and deal making
• Evaluation of resources
• Due diligence
• Evaluation of potential benefits- synergies (modular, sequential, and
reciprocal)
• Evaluation of potential costs- levels of fits
• Strategic fit
• Organizational fit
• Cultural fit
• Plan for level of integration required for deriving benefits, and the associated
costs
• Negotiate with appropriate targets

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Reconfiguration- capabilites for
• Reducing risks in integration
• Customers
• Employees
• Other resources of both firms
• Reshape resources within both firms
• Combine resources, create new resources
• Managing change in organizations

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----Reconfiguration---
• Codified learning from previous acquisitions
• Risk management practices- problem solving approaches- that
customize standard routines to different contexts
• Repeat acquirers tend to integrate more?

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--- Reconfiguration
• Has to be done fast- hence ability to hit the ground running
• Different teams- PMI, Top mgmt, etc
• Ability to create a performance culture
• Linkages with external partners who have related skills- underwriters,
consultants, IB etc
• Training/capabilities of line managers in integration

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Corporate Restructuring to Create Value: The McKinsey Pentagon- useful
for understanding short term value creation

Current
market
value
1
Current perceptions Maximum raider
gap opportunity

Company Optimal
2 5 restructured
value as is RESTRUCTURING
value
FRAMEWORK
Strategic and Total company
operating opportunities
opportunities

Potential value 3 Disposal/acquisition 4 Potential value

with internal opportunities with external
improvements improvements

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Internal vs external capabilities
• Depends on frequency of acquisitions
• Availability of generic and specific resources/quality of consultants
• Key internal people for calculating and managing crucial decisions

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