Strategic Management, CH7, Mergers and Acquisitions
Terms in this set (20)
strategy through which two firms agree to integrate their operations on a relatively co-equal basis.
strategy through which one firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio.
special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid
unfriendly takeover strategy that is unexpected and undesired by the target firm
Types of Acquisitions - Horizontal
-Acquirer and acquired companies compete in the same industry
-i.e., McDonald's acquisition of Boston Market or Yum Brands purchase of Little Sheep.
Types of Acquisitions - Vertical
-Firm acquires a supplier or distributor of one or more of its goods or services; leads to additional controls over parts of the value chain
-i.e., Walt Disney Company's acquisition of Fox Family Worldwide or Coca-Cola's purchase of bottlers.
Types of Acquisitions - Related
Firm acquires another company in a highly related industry
Reasons for Acquisitions
-Increased market power
-Overcome entry barriers
-Less cost of new product development
-Increased speed to market
-Lower risk compared to developing new products
-Learn and develop new capabilities
-Reshaping firm's competitive scope (Important)
-Cost of new product development (Important)
Problems in Achieving Success in Acquisitions
-Inadequate evaluation of target
-Large or extraordinary debt
-Inability to achieve synergy
-Too much diversification
-Managers overall focused on acquisitions
Succesful Merger or Acquisition
As with corporate-level strategy, a merger or acquisition is considered successful when the the resources involved in the two organizations perform better together than they did separately. In other words the whole is greater than the sum of the parts. Otherwise, why do it?
Do most mergers have successful outcomes?
-An interesting empirical fact is that most major mergers have been failures historically. For example, a recent study published in Business Week states that most mergers destroy value (61%).
-A year after the deals the average deal was down by 4.3%, and were 9.2% less than the S&P 500.
The sellers got an average of 19.3% extra for their shares.
-It is also likely that most are not strategic successes, although it is more difficult to find evidence for strategic failure than financial failure (e.g., HP and Compaq).
-And historically, many acquired businesses have eventually been divested.
-Studies show that shareholders of acquiring firms lose around 10 % of their investment on the announcement of the merger, and up to 16% of their investment after three years.
-Acquiring firms nearly always pay a premium--why would someone pay more for a firm than anyone else in the entire world? A: "All mergers are done for Synergy" - but it is usually poorly defined (2 + 2 = 5, etc.).
Evaluation requires that hundreds of issues be closely examined, including:
--Financing for the intended transaction
--Differences in cultures between the acquiring firm and target firm
--Tax consequences of the transaction
--Actions that would be necessary to successfully meld the two workforces
A paradox of effective mergers:
The better the strategic fit, the MORE difficult is the merger process.
Effective Acquisition Strategies - Complementary Assets/Resources
Buying firms with assets that meet current needs to build competitiveness.
Effective Acquisition Strategies - Friendly Acquisitions
Friendly deals make integration go more smoothly
Effective Acquisition Strategies - Careful Selection Process
Deliberate evaluation and negotiations are more likely to lead to easy integration and building synergies.
Effective Acquisition Strategies - Maintain Financial Slack
Provide enough additional financial resources so that profitable projects would not to be foregone.
HR is Critical - perhaps the most critical component - in making mergers successful.
-Integration involves a large number of activities
-Two disparate corporate cultures must be melded
-Effective working relationships must be built
-Different financial and control systems must be linked
-The status of the acquired firms employees and executives must be determined
-Turnover of key personnel must be minimized to retain crucial knowledge
-Acquired capabilities must be merged into internal processes and procedures
-During the HP/Compaq merger, it was said that the merger was comparable to hiring tens of thousands of new employees in a single instant.
is the single most important determinant of shareholder value creation in mergers and acquisitions. It is the primary phase when potential synergies can be achieved.
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