Chapter 10Studying Mergers and Acquisitions

2

OBJECTIVES

Explain the motivations behind acquisitions and show how they’ve changed over time

1

Explain why mergers and acquisitions are important vehicles of corporate strategy

2

Identify the various types of acquisitions 3

Understand how the pricing of acquisitions affects the realization of synergies

4

Outline the alternative ways to integrate acquisition and explain the implementation process

5

Discuss the characteristics of acquisitions in different industry contexts

6

3

THE eBAY-PAYPAL ACQUISITION

The partnership made sense … … but would it work?

Rely on transaction-based revenue

No inventory or warehousing

No sales force

Can we recoup the $250 millionpremium we paid with savingsand revenue growth?

4

MERGER VS. ACQUISITION

Merger

Acquisition

A

A

B

B

C

A

The purchase of one firm by another so that ownership transfers

The “merger”of Daimler with Chrysler

in 1997 is considered by manyto have been an acquisition

in disguise

The consolidation or combinationof one firm with another

5

MOTIVES FOR MERGERS AND ACQUISITIONS

Sometimes termed “Managerialism”, manager can conceivably make acquisitions-and even willingly overpay for them-to maximize their own interests at the expense of shareholder wealth

Managers may make mis-taken valuation and have unwarranted confidence in their valuation and in their ability to create value because of pride, over-confidence, or arrogance

Managers may believe that the value of the firms combined can be greater than the sum of the two independently

• Reduced threats

• Increased market power and access

• Realized cost savings

• Increased financial strength

• Sharing and leveraging capabilities

Managerial self-interest Hubris Synergy

6

M&A – A VEHICLE THAT IMPACTS ALL ELEMENTS OF THE STRATEGY DIAMOND

M&A and the Strategy DiamondWhile mergers and acquisition are explicitly vehicles of strategy, they have major implications for arenas staging, and economic logic as well

Economiclogic

Arenas

VehiclesStaging

Differentiators

Source: Adapted from Hambrick and Fredrickson, “Are You Sure You Have a Strategy?” Academy of Management Executive 15:4 (2001) 48-59

7

US ACQUISITION ACTIVITY

0

2,000

4,000

6,000

8,000

10,000

12,000

1990 91 92 93 94 95 96 97 98 99 2000 01 02 2003

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

$2,000,000

Source: Data compiled from SDC Platinum, a product of Thompson Financial

Value of transactions ($, 2003)

Number of transactions

Value of transactions($, 2003)No. of transactions

8

19721`1`

In 1972, brothers-in-law Leonard Marsh and Hyman Golden and Arnold Greenberg, Marsh’s childhood friend, founded a business called the Unadulterated Food Corporation and began selling juice in Queens. The name Snapple was coined while trying to develop an apple soda. In 1987, Snapple introduced iced teas with fun names and flavors and enlisted (2) controversial radio personalities, Howard Stern and Rush Limbaugh, to promote them

Cadbury Schweppes buys Snapple from Triarc for $1.45 billion. Snapple is now part of the very successful America’s Beverage division, which includes 7up, Dr. Pepper, Mystic, and Mott’s juices, among other brands. Has Snapple found its home?

Fewer than three years later, Quaker throws in the towel and sells Snapple for $300 million to Triarc

UPs AND DOWNs AT SNAPPLE

1994 1997 2000

After sizzling success,Snapple is sold to Quakerfor $1.8 billion

9

THE FLIP SIDE OF ACQUISTIONS

“…the sale preparation process rarely gets the same attention as the acquisition process.”

– McPhee and Heckler

10

BENEFITS AND DRAWBACK OF ACQUISITIONS OVER INTERNAL DEVELOPMENT

• Speed

• Critical Mass

• Access to complementary assets

• Reduced competition

• Move expensive

• Inherit adjunct businesses

• Cannot spread commitment over several years (one-time, all-or-nothing decision)

• Potential for organizational conflict

11

CLASSIFICATION OF ACQUISITIONS

OvercapacityM&A Roll-up-M&A

Product/MarketExtension M&A as R&D

Industry Convergence

Example DaimlerChryslermerger

Service Corporation International more than 100 acquisitions of funeral homes

Pepsi’s acquisition of Gatorade

Intel’s dozens of acquisitions of small high tech companies

AOL’s acquisition Time-Warner

Objectives Eliminating capacity, gaining market share, and increasing efficiency

Efficiency of larger operations (e.g., economies of scale, superior management)

Synergy of similar but expanded product lines of geographic markets

Short cut innovation by buying it from small companies

Anticipation of new industry emerging; culling resources from firms in multiple industries whose boundaries are eroding

Percent ofall M&A deals 37% 9% 36% 1% 4%

Source: J.L. bower, “ Not All M&As Are Alike – and That Matters,” Harvard Business Review 79:3 (2001), 92-101

12

THE SYNERGY TRAP

Acquisition premiums Create two problems for managers

Premiums increase the level of returns

the combined businesses must

extract

The longer it takes to implement performance

improvements, the more likely the

acquisition will fail

13

THE ACQUISITION PROCESS

Source: Adapted from P.C. Haspeslagh and D.B. Jemison, Managing Acquisitions: Creating Value Through Corporate Renewal (New York Free Press, 1991), 42

A process perspective

Idea

Justification due diligence, negotiation

Acquisitionintegration

Results

Decision-makingprocess problems

Integration process problems

14

ACQUISITION SCREENING

“Soft-fit” acquisition screening by Cisco systems

Screening criteria Means of achieving criteria

Offer both short- and long-term win-wins for Cisco acquired company

• Have complementary technology that fills a need in Cisco’s core product space

• Have a technology that can be delivered through Cisco’s existing distribution channels

• Have a technology and products that can be supported by Cisco's support organization

• Is able to leverage Cisco’s existing infrastructure and resource base to increase its overall value

Share a common vision and chemistry with Cisco

• Have a similar understanding and vision of the market• Have a similar culture• Have a similar risk-taking style

Be located (preferably) in Silicon Valley or near one of Cisco’s remote sites

• Have a company headquarters and most manufacturing facilities close to one of Cisco's main sites

15

ABSORPTION

Need for strategic interdependence

Need for organizational autonomy

High

Low

High

Preservation Symbiosis

Holding Absorption

Low

Acquiring company completely absorbs the target company. If the target company is large, this can take time (e.g., Franklin Quest’s acquisition of the Covey Leadership Center to create Franklin Covey)

16

PRESERVATION

Need for strategic interdependence

Need for organizational autonomy

High

Low

High

Preservation Symbiosis

Holding Absorption

Low

The acquiring company makes very few changes to the target , and instead learned from it in preparation for future growth (e.g., many of Wal-Mart’s early international acquisitions)

17

HOLDING

Need for strategic interdependence

Need for organizational autonomy

High

Low

High

Preservation Symbiosis

Holding Absorption

Low

The acquiring company allows little autonomy - yet does not integrate the target into its businesses (e.g., Bank One’s acquisitions of local banks )

18

SYMBIOSIS

Need for strategic interdependence

Need for organizational autonomy

High

Low

High

Preservation Symbiosis

Holding Absorption

Low

The acquiring company integrates the target in order to achieve synergies - but allows for autonomy, for example to retain and motivate employees. This is possibly the most difficult to implement (e.g., Cisco's acquisitions which cost the firm $1 million per employee on average)

19

KEY LESSONS FOR IMPLEMENTING M & As

Integration management is a full-time jobIntegration management is a full-time jobMany successful acquirers appoint an “integration manager” becauseintegration is too much work for acting managers to add to their workloads

Key decisions should be made swiftlyKey decisions should be made swiftlySpeed is of the essence because of the cost and time value of money

Integration should address technical and cultural issuesIntegration should address technical and cultural issues

Most managers focus on technical issues only. This is a mistake

It’s a continual process, not an eventIt’s a continual process, not an eventStart the integration process long before the deal is closed

20

TIPS FROM PERRY AND HERD

Firms must study failed M&As as much as successes.

1

Traditional due diligence is no longer sufficient. With M&A deals increasingly risky, there is more need for pre-deal planning.

2

21

DUE DILIGENCE PAYS

Penalties

Due Diligence

22

M&As AND INDUSTRY LIFE CYCLE

Introduction

M&As tend to be R&D and product-related

Growth Maturity

M&As tend to be for acquiring products that are proven and gaining acceptance

M&As primarily for dealing with over capacity in the industry

23

M&As IN DYNAMIC CONTEXTS

Technological change

Cisco and Microsoft both use acquisitions to ensure they maintain their strong competitive positions

Demographic change

Geopolitical change

Trade liberalization

When the Tribune Company merged with Times-Mirror in 2000, it acquired Spanish-language “Hoy” to target the growing U.S Hispanic market

IBM divested its PC division to a Chinese company as that country emerges

Wal-Mart acquired Mexican retail giant, Cifra, in wake of NAFTA

DeregulationAT&T divested local operations into “Baby Bells” and set off a state of almost constant M&A