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Where we left off Diversification
It is a growth strategy, associated with the granulating strat. Ansoff Matrix, and closeness measures Diversification Discounts 2 Dimensions for Categorizing
Concentric, Horizontal, Vertical, Conglomerate
Defensive, Offensive
Organizational Structure Definition Dimensions: Specialization, Standardization, Formalization,
Centralization, Configuration, Flexibility Organigrams Forms of organizational Structure
U-Form, M-Form (cooperative, competitive), H-Form, X-Form, Matrix organization
Matrix organization: Advantages, disadvantages
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Overview
Merger, Acquisition, Buyout
Types of Mergers Getting a picture of
global M&A Reasons for M&A
NPV, 7 Motivation theories Examples: Entering
markets, Restructuring, Strategic Moves, Complementaries
Steps of a M&A Success/Failure reasons
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Success rates of M&As
Studies show that about two thirds of all M&As fail on average (anywhere from 50 percent to 80, depending on the measure) .
e.g. Allen, 1999; Hudson & Barnfield, 2001; OECD, 2001; Schuler & Jackson, 2001; Slowinski, 2002.
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What the expert says...
“There is a ‘gin rummy school of management’... you pick up a few businesses here, discard a few there.
The sad fact is that most acquisitions display an egregious imbalance - they are a bonanza for the shareholders of the acquiree; they increase the income and the status of the acquirer’s management; and they are a honey pot for the investment bankers and the other professionals on both sides.
But alas, they usually reduce the wealth of the acquirer’s shareholders, often to a substantial amount.”
-Warren Buffet, Chairman Berkshire Hathaway
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Definition Mergers & Acquisition
An ‘acquisition’ normally involves the purchase of another firm’s assets and liabilities, with the acquired firm continuing to exist as a legally owned subsidiary of the acquirer. ‘Takeover’ is often used for hostile acquisitions.
A ‘merger’ of equals on the other hand is a combination of two firms where a new corporate entity is created by exchanging the shares of both companies for shares in the new company.
Most M&As, however, are simple acquisitions since only around three percent of all deals can be classified as real mergers between equals (Buckley & Ghauri, 2002).
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Buyouts
Buyout is defined as the purchase of a company or a controlling interest of a corporation's shares or product line or some business.
A leveraged buyout is accomplished with borrowed money or by issuing more stock.
Management buyout when managers purchase controlling interest from existing shareholders.
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Buyouts
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Types of Mergers
Horizontal mergers: two companies in the same industry
Vertical mergers: along the value chain of a good/service
Product-extension: access to complementary products
Market-extension: access to complementary markets
Conglomerate mergers: different industries
src: Federal Trade Commission (FTC)
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M&As occur in waves
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Global M&A
First 6 months of 2007: $2.7 trillion
465 deals worth over $1 billion each.
Avg size: $298m, 58% higher than 2006
Number of hostile bids (407) was almost four times greater.
American comp. targets of more than $1 trillion-worth of deals
Emerging markets were targets of $370 bil., or 13% of the world total.
Banks earned $11 billion in advisory revenues in the first half of 2007
2008 15% less deals in US and 30% in Europe
Third quarter 2009, about 40 percent of the acquisition deals involved divestiture, up from 25 percent one year ago.
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Reasons for M&A
Do they differ from Growth & Diversification reasons? How?
NPV (A + B) > NPV (A) + NPV (B)
NPV := Net Present Value
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7 Motivations for M&A
Monopoly Theory: Gaining market power.
Efficiency Theory: Operating synergies, financial synergies and management synergies.
Valuation Theory: Bidder managers have better information about the target's financial performance than the stock market.
Empire Building Theory: Planned and executed by managers who maximize their own utility instead of their shareholders value.
Process Theory: Mangers have only limited information and base decisions on imperfect information.
Raider Theory: Managers creating wealth transfers from the stockholders of the companies they bid for.
Disturbance Theory: Merger waves are caused by economic disturbances.
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Chinese M&A
“Beijing wants Chinese firms to gain
access to foreign technologies, raw
materials and skills. In September
the government established China
Investment Corp (CIC) with $200
billion of the country's $1.4 trillion in
foreign reserves, mostly to make
purchases abroad.”
(src: economist.com, 2007)
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Japanese M&A: Restructuring companies
“Conglomerates may have hundreds of subsidiaries in unrelated industries; they are a traditional place to park loyal executives once they reach 60 to give them a few extra years of work. Much of the intra-group M&A activity consists of companies bundling together disparate subsidiaries in the same industry in order to manage them better or sell them off. In this way, Japanese companies are using M&A as part of a broader corporate restructuring, says Steven Thomas of UBS, an investment bank.”
(src: economist.com, 2007)
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M&A as a strategic move: Oracle and SAP
Oracle first tried to move beyond databases and other “infrastructure” software (which together produce two-thirds of its revenues) and break into enterprise applications with its own programes. When this failed, it decided to lead consolidation of the software industry and “surround” SAP with acquisitions, in the words of Larry Ellison, its chief executive. Since 2003 Oracle has bought more than 30 firms for about $25 billion in total. BEA does not sell applications, but it will help Oracle win new customers.(The Economist, Oct 18th, 2007)
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M&A for complementary products:Ebay’s purchase of Skype in 2005 “Skype will provide eBay
with communication platform as a complementary product.”
$2.6 billion with up to 1.5bn more if Skype met certain targets
Skype had 7mio USD turnover in 2004
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The story goes on...
“This week eBay said that it would take a $1.4 billion charge in relation to the purchase. The bigger part, a so-called impairment write-down, represents eBay's loss on its ill-fated investment.” (The Economist, Oct 4th, 2007)
Wanted to sell 65% of shares for 1,9bn USD to an Investment firm in September 2009. But got sued by Skype founders: Ebay had forgotten to buy the IP rights for all technology used in Skype...
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Steps of an M&A
1. Formulate Focus or Diversify Strengths to build on and use to create synergies Opportunities Matching Resources and Opportunities
2. prospect (locate, investigate) Search process Looking behind the figures Evaluation: shared resources, transfer of skills, econ. of scale/scope
3. Negotiate & acquire
4. Integrate: people, culture, structures, systems & procedures
(src: adapted, Galpin & Herndon, Thompson & Martin, 2005)
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Information available
BEFORE Organigram Data on salaries Information on top
mgmt Products Plants Corp. identity, img,
reputation Past records, esp.
Financial
(src: Thompson & Martin, 2005)
AFTER Inner philosophy
& culture Quality of staff in
decision roles Salary and Decision
processes Interrelationships,
power bases, hidden conflicts, org. politics
Individually pursued objectives
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Success factors
Burgman (1983) 600 US acquisitions:
The higher the premium to acquire, the less likely to be successful
Prospects of success depend on the acquirer having a functional appreciation of the business
Success depends on ability to retain key managers Large acquisitions were often more successful as the
sheer size required a thorough appraisal beforehand
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Reasons for failure
(Rather) seldom Pre-merger: formulating goals locating the right company prospecting and inspecting the target company (Due
Diligence) negotiating on price and conditions
Frequently failing to integrate post-merger: Understanding of business Governance structure Leadership Culture assimilation
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Failure to integrate Social Network Analysis can reveal lack of
integration
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Wrap up
Definitions Merger, Acquisition, Buyout
Types of Mergers Horizontal, Vertical, Product-extension, Market-extension,
Conglomerate mergers
Getting a picture of global M&A Reasons for M&A
NPV, 7 Motivation theories Examples: Entering markets, Restructuring, Strategic
Moves, Complementaries
Steps of a M&A Success/Failure reasons
Seldom premerger, often failure to integrate
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References
Burgman, R. J. A strategic explanation of corporate acquisition success Purdue University, 1983 (quoted in quoted in: Mc Lean R.J. April 1985 How to make acqisitions work, Chief Executive)
Thompson, J. & Martin, F. Strategic Management: Awareness and Change Thomson Learning, 2005
Harford, J. What drives merger waves? Journal of Financial Economics, 2005, 77, 529-560
Additional reading: Lubatkin, M. 1983. `Mergers and the Performance
of the Acquiring Firm.' Academy of Management Journal, 8(2), 218-225.
