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International Strategy and Organization
Internationalization through Mergers and Acquisitions
0447092 ALVES, João
0447093 BORREGO DO VALE, João
0447094 LAGINHA, Luís
0447095 NUNES, Bruno
Overview - 1
Alliances vs. AcquisitionsThe Value of M&A StrategiesPerformance Implications of M&AReasons for M&ASustained Competitive AdvantageImplications for Bidding Firm ManagersImplications for Target Firm Managers
Overview - 2
Decision of InternationalizationEntry ModesProblems in Entry ModesPerformance of M&AsSynergy Realization of M&AsCase Study: “Mannesmann and
Vodafone: The unfriendly takeover”
Alliances vs. Acquisitions
Alliances allow simultaneous and fast entering into multiple countries
Objective: achieve complementary capabilities or economies of scale
Do not have high risks of failure and high transaction costs
Alliances vs. Acquisitions
Acquisitions allow for a greater rationalization than alliances
In alliances all decisions must be made by consensus among the partner firms
Alliances are transient in nature and must remain reversible
Alliances vs. Acquisitions
Alliances are inherently less efficient than acquisitions
Future alliances might be formed as a first step toward a merger
Alliances make it possible to avoid the culture shock in the wake of an acquisition
The Value of M&A Strategies
The unrelated caseNPV(A+B) = NPV(A) + NPV(B)P = NPV(A+B) – NPV(A)Only generates normal economic profit
The related caseNPV(A+B) > NPV(A) + NPV(B)
M&A: The Related Case
FTC Categories Vertical Merger Horizontal Merger Product Extension Merger Market Extension Merger Conglomerate Merger
Lubatkin (1983): Technical economies Pecuniary economies Diversification economies
M&A: The Related Case
Jensen and Ruback (1983): To reduce production or distribution costs
1. Through economies of scale2. Through vertical integration3. Through the adoption of more efficient
production or organizational technology4. Through the increased utilization of the
bidder’s management team5. Through a reduction of agency costs by
bringing organization-specific assets under common ownership
M&A: The Related Case
Jensen and Ruback (1983) (cont.): Financial motivations
1. To gain access to underutilized tax shields
2. To avoid bankruptcy costs
3. To increase leverage opportunities
4. To gain other tax advantages To gain market power in product markets To eliminate inefficient target management
Performance Implications of M&A
The more strategically related bidding and target firms are, the more economic value M&A create
Economic value appropriated by the owners of the target firm
Why do managers of bidding firms continue to engage in M&A strategies?
Reasons for M&A
Ensuring survivalFree cash flowAgency problemsManagerial hubrisThe potential for above-normal profits
Sustained Competitive Advantage
To generate above-normal profitsValuable, rare, and private synergies
between bidding and target firmsValuable, rare, and costly-to-imitate
synergies between bidding and target firmsUnexpected valuable synergies between
bidding and target firms
Implications for Bidding Firm Managers
Search for valuable and rare synergiesKeep information away from other
biddersKeep information away from targetsAvoid winning bidding warsClose the deal quickly
Implications for Target Firm Managers
Seek information from biddersInvite other bidders to join the bidding
competitionDelay but do not stop the acquisition
Decision of Internationalization
Knowledge Clusters Interrelated groups of firmsTechnology leading firmsHighly skilled labor In urban areas or regions nearby
Incentives to not enter intoKnowledge SpilloversLocals may imitate know-how
Entry modes
3 Entry Type ModesGreenfield InvestmentJoint VentureAcquisition
Greenfield Investment (79%)Acquisition (15%)Joint Venture (6%)
Assets
AcquisitionProblem if acquired have a high ratio of
undesired resourcesAdvantage to ‘plug into’ a local firm
Greenfield InvestmentGradually develop its own network
Joint VenturesOnly have access to selected assets
Problems in Entry Modes
AssetsAbsorptive CapacitySocial Entry BarriersLocal Labor MarketInstitutions and Membership
Problem of Absorptive Capacity
Entry Mode Advantages Disadvantages
Greenfield Investment
Slow and expensive communication process
May fail to build own code books
Joint Venture Access to local 'interpreter' Internal communication problems
Risk of imitation by partner firm
Acquisition Acquisition of code books
Long process of constructing code books ‘Interpreter’ for the firm Transfer knowledge from local do global Preferred should be Acquisition
Problem of Social Entry Barriers
Entry Mode Advantages Disadvantages
Greenfield Investment
Lower social entry barriers through signaling commitment
Slow and expensive trust-building process
May remain an outsider
Joint Venture
Lowering social barriers through preserving local 'flavor'
Access to indirect networks through local partner firm
Acquisition
Acquisition of direct networks Hostile acquisitions may raise social entry barriers
Acquisition of indirect networks through employees' social
relations
Direct networks may dissolve after acquisitions
Employees key to indirect networks may leave after acquisition
Local Labor Market
Entry Mode Advantages Disadvantages
Greenfield Investment
Less insecure hiring process Slow hiring process
Joint Venture Access to partner firms' labor Scale problems
AcquisitionAcquisition of labor Knowledgeable employees may
leave after acquisition
Condemned by local firms – firms should avoid the raise social barriers
Personnel may want to quit after acquisition Joint Venture may be more costly than
acquisition
Institutions and Membership
Entry Mode Advantages Disadvantages
Greenfield Investment
Slow and expensive process of becoming a member
Joint VentureAccess to membership through
local partner firmRisk of partner firm appropriating
benefits
AcquisitionAcquisition of membership through
employeesEmployees key to membership may
leave after acquisition
Specialized firms and educations and research institutions
Creation of shared codebooks Same problem as in the social entry barriers
Performance of M&As
Strategic ManagementEconomicsFinanceOrganizational ResearchHuman Resources Management
Synergy Realization of M&As
M&As success is calibrated by the degree of synergy realization
Combination potential
Organizational integration
Lack of employee resistance
Achieving Synergies through Combination Potential
“Economies of sameness” – similar operations “Economies of fitness” – different, but
complementary operations
Operational synergies Administration synergies Managerial synergies Financial synergies
Achieving Synergies through Organizational Integration
Degree of interaction (the greater it is, the greater the degree of synergy realization)
Coordinative effort to improve the quality of interaction (with special integrators, transition teams and preplanning
Little, or poorly executed, interaction and coordination are unlikely to produce substantial joint benefits
Employee resistance, undermining synergy realization
M&As affect career plans M&As create appearance of psychological
problems such as: “We versus they” antagonism Condescending attitudes Distrust, Tension and Hostility
Grave cultural problems
Occur more with similarities in operations than in differences
Other important factors of synergy realization
Management style similarity Attenuates employee resistance Cushions the degree of change and enhances cooperation
Cross-border Combination Impede the interaction and coordination because of country
differences Culture clashes promoting employee resistance May speed new markets access and promote globalization
synergies Relative Size
Insufficient managerial attention to smaller targets Positively associated Organizational integration
Case Study
Mannesmann and Vodafone – The Unfriendly Takeover
Vodafone – focus on providing mobile telephone services
Mannesmann – aimed to become the European leader in integrated telecommunications
Main objectives
Achieving a bigger scale that would stimulate cost reduction
Achieving technological leadershipAchieving a significant presence in
continental Europe
The takeover - 1
Vodafone’s expansion focused exclusively on mobile communications
Acquiring Mannesmann would give a quick access to the German telecommunication market and foster the fast growing strategy
The takeover - 2
Friendly start – Vodafone starts negotiating with Mannesmann
Defensive Tactics – Mannesmann acquisition of Orange
Vodafone’s response
The takeover - 3
The final bid53.7 Vodafone shares for each
Mannesmann share (266.40 € each; total of 120 billion €)
Synergy effects
Customer base from 28 million to 59 million
Enhancement of logistics, marketing strategy, brand awareness and technological capacity and capabilities
Product development, based on technological innovation became the watchword
Questions and Considerations
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