M

A

R

C

U

S

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5

MERGERS, ACQUISITIONS

AND DIVESTITURES

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Chapter Learning Objectives

Understanding the difference between business and corporate strategy.

Being cognizant of the different forms of firm organization including horizontal and vertical integration.

Being aware of the reasons there has been so much merger, acquisition, and divestiture activity.

Understanding the motivations for this activity, the outcomes of this activity, and what can be learned from it.

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Chapter Learning Objectives (Continued)

Realizing how such factors as deregulation have speeded up the pace of this activity.

Becoming acquainted with portfolio management techniques such as the BCG matrix and the GE/McKinsey model.

Examining vertical integration.

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Firm Options to Expand or Narrow Scope

It can do so through internal ventures and development

It can partner with and form alliances with other firms, for example, by means of joint ventures

It can acquire or merge with other firms that have the resources, capabilities, and competencies it needs

It can eliminate some areas by divesting, liquidating, selling, or disposing of them

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ConglomerateConglomerate

VerticalVertical

Related ProductRelated ProductMOVES

Horizontal

Dominant Product

Ex. 5.1 Expanding the Scope of the Firm: Five Choices

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Ex. 5.2 The Main Tasks of Corporate Strategy

Determine the scope of the firm. Decide what business or businesses to be in. * Should the portfolio be broad or narrow? Horizontal, dominant product, related product, vertical, or

conglomerate * What merger, acquisition, and divestiture (MAD) strategy

should be adopted?

Create cohesiveness and direction among the assembled pieces. Allocate resources to the different businesses Help formulate their business strategies Coordinate their activities Control their performance

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Motivations Behind M&As

To expand

To avoid or halt decline

To cut costs

To bring about turnarounds

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Motivations Behind M&As (Continued)

To gain access to products and technologies

To gain production or distribution capabilities

To increase earnings per share

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Ex. 5.5 Railroad Industry’s Major Players, 1999

Company Total Track Routes (miles)

Revenues

($ billions)

Burlington Northern Santa Fe

Union Pacific

CSX

Norfolk Southern

Canadian National

33,500

33,400

23,000

21,600

17,000

9.1

10.2*

6.6*

5.2

3.6

* Union Pacific and CSX have nonrail subsidiaries that contribute to revenues

Source: H. Sun, “The Sources of Railroad Merger Games,” The Transportation Journal 39,, no. 4.

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Ex. 5.6 Banking Industry Deposits (in $ billions)

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Why Do M&As Fail?

Price too high

Products or services less than expected

Lack of marketing leverage

Few benefits for the overlapping of core competencies

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Why Do M&As Fail? (Continued)

Cultural problems

Unfriendly mergers and acquisitions

Failure to retain key personnel

Failure to achieve a turnaround

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Key Issues For an Acquisition to Succeed

1. Does the acquirer’s management team know enough about the acquired company’s businesses to completely run them?

2. Are the businesses of the acquired company more attractive than the businesses in which the acquiring company is engaged?

3. Are the costs of entry so high that they will destroy the added income the acquiring company hopes to gain?

4. Is it possible to establish synergies between the new and old businesses?

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Sources of Synergy

1. Sharing of tangible resources (research labs, distribution systems) across multiple businesses

2. Sharing of intangible resources (brands, technology) across multiple businesses

3. Transferring functional capabilities (marketing, product development) across multiple businesses

4. Applying general management capabilities to multiple businesses

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Ex. 5.8 Top Management’s Role: Theory and Practice

In Theory In PracticeCreates value

Acquires new businesses

Restructures inefficiently

managed businesses

Transfers skills and

capabilities to divisions

Establishes linkages

Determines logic of

integration

Is often in conflict with divisions over strategic and operational issues

May try to impose

uniformity despite

advantages of differences

May be pushed to limit by

complex systems for

managing interrelationships

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Management’s Corporate Strategy Roles

1. Expansion2. The M-Form3. Portfolio Management4. Contraction

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Ex. 5.9 SWOT Analysis

QUESTION MARKS

Selectively hold and increase

STARShold and increase

CASH COWShold and maintain

DOGSharvest and divest

High LowLow

High

Internal Strengths and Weaknesses

Ext

erna

l O

ppor

tuni

ties

and

Thr

eats

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Ex. 5.10 GE/McKinsey Model: Evaluation Criteria

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Ex. 5.11 Vertical Integration: Entertainment Industry

Resources Creation Delivery Retail

Actors

Writers

TV production

Movie production

Broadcast TV networks

Cable TV networks

Movie distribution

Local affiliates

Local cable cos.

Local theaters

Content Distribution

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Ex. 5.12 Vertical Integration at Disney