strategic alliance jv m&a dec14

8/10/2019 Strategic Alliance JV M&a Dec14

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Strategic Alliances & Joint

Ventures, M & AsProf A K Mitra


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Alliances

Cooperative / collaborative arrangements between two

or more firms (who could be potential or actualcompetitors) could be :

Strategic Alliances

JV

R&D partnerships, Manufacturing / Marketing agreements

Licensing, Franchising

Consortia

Value Chain Partners

SA /JVs constitute multiple pathsto value enhancement

along with internal growth, as well as M&As

Surge in Alliance activities reflected a change in antitrust

legislation and policies of regulatoryagencies. Initially,

the aim was to encourage joint research and development

activities, but later extended to production.


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Alliances involve technology transfers, licensingagreements, cross-manufacturing agreements,outsourcing

Globalization, heightened global competition,de-regulation ,emergence of competitiveindustries from newly industrialized countries,need for short product and businessdevelopment cyclesare resulting in trend towardsgreater cooperation

Loci of global business battles shifting towardsemerging markets like China, India, Brazil hasalso led to growth of alliances


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Illustrative SA & JVs VS M&A: 1985 -2002

(Transactions per Year) SA/JV M&A

Coca-Cola 5 14

Dow Chemicals 7 16

Exxon/Exxon Mobil 3 17

Ford 10 20 GE 11 67

GM 13 30

Intel 16 12 Microsoft 46 12

Merck 5 4

P&G 5 12


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Strategic Alliances A Strategic Alliance is a relationship between

firms that allows firms to create more value thanthey could individually.Commitment to co-operate in some form of relationship.

The firms come to attain agreed upon goals, whilemaintaining the independence

The term strategic alliances has been used todescribe relationships among companies that aresomething shortof establishing a JV entity.

Firms enter Strategic Alliances with theircompetitors, suppliers, and customers GM and Toyota to assemble automobiles

Siemens and Philips to develop new semiconductortechnologies


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Motives for Strategic Alliances

SAs enable firms to manage risk, gainknowledge, increase expertise, and learn aboutnewtechnologies

SA enable firms to design new products, minimizecosts, enter new markets, preempt competitors,and generate high revenues.

Enables transfer of technology and further

organizational learning. SA Opens avenues to newopportunities for partners, can improve a firmsstrategic positioning in the market, and sometimeseven transform a company.


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SA for entry into new markets- Motorola with

Toshiba in 1980s. Motorola was finding itdifficult to get entry into Japan for cellular phones.Motorola entered into alliance with Toshiba to

build microprocessor. Toshiba provided Motorola

marketing help SA to share costs & risk associated with new

productsor processes

SA to combine skills & assetsthat neither can

develop on their own. In 1990, AT&T entered intoalliance with NEC corporation to trade technologyskill / core competency; AT&T gave NEC CADtechnology and NEC gave advanced computer

chip.


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Some US-Japanese Strategic Alliances

ToshibaIBM : Sharing $ 1b cost to develop 64mb and 256 mb memory chip factory

Cannon-HP: While these two organizations

compete fiercely with end products, they share

laser technology, and HP buys printer engines

from Cannon. Cannon holds 40% world share in

printer engines

ToyotaGM : GMs Delphi parts divisionsupplies components to Toyota. GM even

participates in Toyota Keiretsu strategy meetings.


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Types of Strategic Alliances

Bleeke & Ernst classifiedSAs into SIX types,according to power of companiesthat enter intoalliance and the possibility that the alliance mightend in the sale of one or more of the participants

Collisions between two partners(strong & direct competitors) Evolution to a sale(strong & initially compatible partners)

Alliances of complementary equals( lives beyond 7yearsaverage life span of for alliances)

Disguised sale(between a weak & a strong company)

Bootstrap alliances( weak company may improve its competencies)

Alliances of the weak


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Another classif ication of Strategic Al l iance

Doz & Hamels classificationof Strategic

Alliances into 3 types of SAAlliance betweenpotential competitors to

neutralize rivalry(Airbus consortium bygovernment of EU countries vs Boeing)

Alliance between companies that have separatespecialized resources( Hitachi with GE for gasturbines, AT&T and NEC)

Alliance which involves acquisition of newknowledge by working togetheror observingeach other. Eg; Toyota & GM ( learningToyotas lean manufacturing & GMs superiordesign)


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Partner Selection in Strategic Alliances.. The success of an Alliance depends on three main

factors: Partner selection: should share strategic goals & purpose for

alliance. Should not have altogether different agendas. Should not

exploit the alliance for selfish ends only.

Putting an appropriateAlliance structure:ownership,mix of finance, technology , control, sharing of activities etc should

be clarified. Mechanisms to maximize value for partners, resolve

conflicts, walling off sensitive technology / know how, avoid risk

of opportunism.

Managing the alliance: build trust and learn from each

other and build interpersonal relationship between the

firms managers. Ability to learn often limits gains from

alliance. Most learning takes place at lower levels.


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Benefits Of Str Alliances vs industry types

It appears that that SA represents a form of

exploratory learning. SAs have potential to evolvein directions not initially planned.

In high-tech industries, whereturbulence&change dominate, strategic alliances are used toscan market entry possibilities, to monitor new

technological developments and reduce the risksand costs of developing new productsand

processes.

As industries mature, learning and flexibility

becomes less important, so integration throughM& Ais more likely.

The hypothesis that larger firms use their strategictechnology alliances to take over their smaller

partners is not validated by some studies.


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Robinson (2002) found that alliances are positivelyrelatedto industry risk, industry growth, and withnumber of acquisition targets in an industry.

He also found support for views that alliancescluster in R&D intensive industries.

He observed that alliances are more common thanmergers when the parent f irm is less r iskyand thealliance or target activity is more r isky.

Among multi-division firms, alliance activitiestend to take place in the relatively more riskysegments.


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Observations of Hamel, Doz & Prahalad

A strategic alliance can strengthen both partners

against outsiderseven as it weakens one partnervis--vis the other. Alliances between Asian

companies and Western rivals seem to work

against western partners

Success of Alliance should not be judged by its

longevity but by the shifts in competitive

strength on each side.How companies

collaboration to enhance their internal skills &technologies while guarding against transferring

competitive advantagesto ambitious partners


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Collaboration is competition in a different formpartners may be out to disarm them. Both enteralliances with clear strategic objectives, they alsounderstand how their partners objectives willaffect their success.

Cooperation has limits. Companies must defendagainst competitive compromise

Learning from partners is paramount: successfulcompanies view each alliance as a window on their

partners broad capabilities.

Harmony is not the most important measure ofsuccess.


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Japanese company had made greater effort to learn

Strategic intent is an essential ingredient in thecommitment to learning.

Western companies, on the other hand, oftenentered alliances to avoid investments. They are

more interested in reducing the costs & risks ofenter ing new business or marketsthan inacquiring new skills.The US companies had noambition beyond avoidance

Many so-called alliances between Western & Asianrivals are little more than sophisticated outsourcingarrangements. The traffic is almost entirely onesided. Western companies become dependent onthe partner.


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When both partners are equally intent on

internalizing the others skills, distrust & conflictmay spoil the alliance. Reason why alliances

between Koreans & Japanese have been very few &

short.

Alliances seem to run most smoothly when onepartner is intent on learning and the other is intent on

avoidance.

But running smoothly is not the point; the point is

for a company to emerge from an alliance more

competitive than when it entered in it.


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Some research findings

A study of 119 strategic alliances for the period1987-91 ( published in 1998) showed

Technology alliances consisted of R &D,

Technology transfer/ licensing, manufacture

Marketing alliances included distribution, mktng /

promotion, & customer servicing

The researchers argued that the market perceives

technological alliances as having greater positiveimpact on future income streams.

In technological alliances, larger firms depend on

their smaller partners for resources ( technology)


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The stronger bargaining power of smaller partners

is associated with significantly higher returns thanthose of the larger partners.

In another study, published in 2002, showed thatfirms with greater alliance experience, which

create a dedicated alliance function, recordedhigher cumulated average returns and highersuccess rate.

Such firms are likely to codify alliance-

management knowledge by creating guidelines &manuals covering partner selection, alliancenegotiation, alliance contracts, alliancetermination etc., develop alliance metrics tomonitor alliance performance on an ongoing basis


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First, SA must have well defined strategic

themes


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Joint Ventures JVs are cooperative agreements between two or

more firms that want to attain similar objectives,creating a new corporate enti ty

JV allows allows partners to own a stake and play arole in the managementof the joint operation.

Participating firms also benefit by having access toexternal capital.

Most of the time, a JV represents a potential sourceof growth of an organization.

JVs are the only way in some countriesfor a

foreign company to set up operations. Equity JVs are contractual agreements with equal

partners. Non-equity ventures are ones where onepartner has a greater stake.


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Rationale for Joint Ventures Strategic Planning: JVs are used in combination

with internal developments, mergers, acquisitions ,

and so on as a time phased program in formulating& executing a firms long term strategyfor valueincreasing growth (increasing market power).

Sharing investment: A company with adequatecash may enter into JV with a smaller companywithtechnical expertise but lacking funds.

Risk reduction /sharingor withstanding longgestation period before returns start flowing, mayalso be a rationale. For example exploration of

petroleum Knowledge Acquisition: The expressed purpose of

50% of all JVs is knowledge acquisition. Thecomplexity of the knowledge to be transferredis akey factor in determining the contractualrelationship between partners.


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When knowledge to be transferred is complexorembedded in a complex set of technological or

organizational processes, learning by doingandteaching by doing is the most appropriate means oftransfer. JV seems to be an most appropriatevehicle.

Gaining approval from government authorities:Possibility of JVs getting approval from antitrustauthorities is greater than mergers(?)

JVs help in a acquiring complementarytechnological or management resources at lower

cost,or to derive benefits from economies of scale,critical mass and learning experience.

Tax advantages: JVs in many circumstances maybring tax advantages


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International aspects: JVs can be used to reduce

the risk of expanding into a foreign environment.In some countries legally require a local jointventurer. International JVs might bring advantageof favorable tax treatmentorpolitical incentives.

JVs can facilitate different types ofrestructuringactivities for either or both

participating firms in the JV. ( Philips AppliancesdivisionWhirlpool JV in 1989) ( Buyer can use

the JV experience to better determine the value ofbrands, distribution systems, and personnel whileminimizing the risk of making early mistakes).


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The JV contract too inflexibleto permit futureadjustments

Lack of commitmentof time & effort inimplementation

The hoped for technology could never be developed

Lack of adequate pre-planning Failure to reach agreement on alternative approaches

to achieve the basic objectives of the JV

Refusal of managers in one company to share

expertise with their counterparts Inability of partner companies to compromise /

share on difficult issues

Clash may arise on some point of time with publicpolicy or long term strategies of one of the firm


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Requirements for successful JVs include thefollowing:

Each participant has some thing of value to bring tothe activity.

Participants should engage in careful pre-planning

The resulting agreement or contractshould providefor flexibilityin the future as required

The planning should includeprovisions fortermination arrangements, including provisions for

buy back by one of the participants

Key executives must be assigned to implement theJV

It is likely that an organization structure would beneeded with the authority for negotiating and

making decisions.


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JVs in IndiaPress Note 18& Press Note I(2005)

Press Note 18 was introduced by Government in

mid 1990s for JVs or technical collaborationbetween a foreign partner & an Indian company.

Objective: to protect the Indian partnerwhomay have invested substantially in the JV / Tech

collaboration against opportunistic behaviorofthe Foreign partner

It made mandatory for a foreign partner to seekNOCfrom the domestic partner, if it wanted to

start a new ventureon its own or with someother part in the same or similar field

This provision was misusedby some Indian firmsto block FDIin an illogical manner


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Press Note 18, put in some cases, the foreign

partner at mercy of the local partner ( even when

the said JV has turned dead or sickand proposed

new venture are for an economic activity different

from that of the existing JV). The new Press Note I ( of 2005) has substantially

revised and simplified the provisions of the Press

Note 18, to make it fair to ensure FDI at the same

time safeguard local business from unfaircompetition from its JV partners or technology

partners.


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Under Press Note I, mandatory consent from local

partner is limited to starting new business in thesame field ( word similarremoved)

Provisions of PN I is also required only for

existing JVs or Technical agreements. New JVs /collaborations will have to be based on the free

will of partners ( governed by the contract entered

by them) without any government interference.

Press Note I will also not be applicable in existingJVs / technical collaborations for:


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Investments made by venture capital funds

Where the existing JV is clearly defunct or sick

Where FDI stake is less than 3%


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Mergers & Acquisitions

Mergers can be defined as the integration of two or morefirms on co-equal basis. The concerned firmspool all theirresourcesto create a sustainable competi tive advantage.

An acquisition refers to the process of gaining partial orcomplete control of one company by another for some

strategic reasons. Unlike mergers, acquisitions can sometimes beunfriendly

hostile takeover

M&A have become very popular strategy in the last twodecades

M&A played a crucial role in restructuring of the US andEuropean companies during 1980s & 1990s


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Historical Perspectivemerger activity can be seen as areaction to changing business environment , changes intechnology etc

First merger wave: 1897-1904; mainly horizontal mergers Second wave: 1920-1929- vertical & conglomerate mergers

railroads and utilities

Third wave: 65-75- emphasis on economies of scaleinconsumer goods

Fourth Wave : 84-87-empasis on creating synergies.Technology played important role, Large number ofmergers in Europe

Fifth wave: 95 onwards impact of globalization andderegulation

In late 90s, mergers common in industries where marketsare global in naturelike Automobiles, Pharma and inindustries deregulation & liberalization were effected (Telecom, Utilities)


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Rationale for M &A

Increased Market Power:Companies targetcompetitors, suppliers, distributors, or businessesin related industries. Horizontal mergers: purpose could be economies of

scale; share resources, skills and to derive synergy.Government sometimes regulateto prevent monoplisticconditions. eg; EU stopped GE & Honeywell merger

proposal.

Vertical mergers: firms in same industry but in different

stages of the value chain. Reduction of costs ofcoordination, communication, better planning forinventory & production( HLL & Tata Tea buying Teagardens in Assam)


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Conglomerate mergers Product extension merger

Geographical extension mergers Pure conglomerate merger

Financial conglomerates

Overcoming entry barriers: economy of scale ,product loyalty, high advertisement expenses could

be entry barriers Cost of new product development: developing &

successfully marketing new products takes a longtime, 88% new products fail to achieve expected

results, 60% innovative products get copied withinfour years. Firms prefer M&A to avoid internalcost & risk of new products


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Increased speed to market: M& As are quicker

route to new markets and new capabilities. Newcapabilities can be put introduce new products in

new markets

Lower Risk compared to new products

Increased Diversificationde-risking

Reshaping competitive scope

M&A as mode to enter / quickly gain market in

Foreign countries: In India Whirlpool acquiringKelvinator, Electrolux acquiring Maharaja

International, Intron.


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Efficiency Theories of Merger..

Mechanism for more efficient use of capital, increased

productivity through economies of scale, have potentialfor social benefits:

Differential Efficiency Theory: Acquiring companiesmanagement more efficient to extract potential of targetcompany. Managerial synergy hypothesisis an extensionof differential theory, where acquiring managementcompliments the management of acquired company, hasexperience in the line of business of acquired company.Managerial synergy theory most applicable for Horizontalmergers ( not to conglomerate mergers).

Inefficient Management theory: target companysmanagement is incompetent in the complete sense.Another control group is in a position to manage the assetsof the firm better.


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Synergy ( means 2+2=5)

Financial synergy: positive impact on costof capital toacquiring / combined firm. This may occurs due tolower costs of internal financingversus externalfinancing. A combination of firms with different cash

flowsand investment opportunities may produce afinancial synergy effect.

Operating synergy(HindalcoIndal deal synergy):economies of scale are most in businesses with highOverhead expenses.

Pure Diversification: benefits managers,employees, owners and the firm itself. Reduces therisk by spreading. Financial synergy & tax benefits


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Strategic Alignment to Changing Environments

: much rapidly adjustmentto changes . Achievingeconomies of scale or using underutilizedmanagerial capacity of the firm. Acquiremanagement skills needed for increase in its

present capabilities. Major forces: Regulatory change: Deregulation in financial services,

telecom, media reducing artificial barriers. This helpedM&A to achieve operating efficiency.

Technological changes:Large firms often look to M &

A as the fast and inexpensive way to acquire newtechnologies and knowledge generated throughcreativity and speed of smaller firms . Shorter innovationcycle. ( Eg CISCO)


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Undervaluation: Undervaluation of the

target companies can also be one of the

motivating factors leading to mergers &

acquisitions. Undervaluation may be

because of the underperformance of themanagement.


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Information and Signaling

Information Theorysuggests that the share priceof target f irm is revalued upwardsafter a tenderoffer whether it is successful or not. The tenderoffer generates new information and revaluation isgenerally permanent.The offer also motivates the

management of the target companyto implement amore eff icientbusiness strategy on its own.

Signaling theorysuggests that a tender offer is initself a signal to the market that the f i rm possessesunrecognized additional valuesor that the futurecash flow stream would be increasing in the nearfuture.


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Hubris Hypothesis: implies that managers lookfor acquisition of firms for their own potentialmotives and that the economic gains are not theonly motive.

The urge to win the game in tender offer oftenresults in the winners curse( firm whichoverestimates the value of target mostly wins thecontest). Desire to avoid a loss of face, media

praise, urge to project as an aggressive firm,inexperience, overestimation of synergies, overenthusiasm of investment bankersadd to theissue.


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Valuation of the Target Company..

Discounted Cash F low Method:PV of the expected value

of the stream of future cash flows discounted for time &

risk. Most valid from theoretical stand point, it is needs lot

of assumptions to be made.

Comparable companies method: based on premise that

firms in the same industry provide benchmark forvaluation. Target company is valued vis-s-vis its

competitors on several parameters

Book value Method: Discover the worth of the target

company based on its Net Asset Value. Market Value Method: This method is used to value listed

companies based on stock market capitalization.


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Acquirer rarely relies on a single method forvaluation.

Normally the target companies are valued byvarious methods. Different weights are assigned tothe values computed by various methods.

The weighted average valuation helps to reduceerrors that may creep in if a single method is reliedupon.

Often a range for the probable valuation is arrivedat.


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The Merger Acquisition Process.

M&A process can be divided into aPlanning Stage: development of the business &

acquisition plans

Implementation stage: consists of search,

screening, contacting the target, negotiation,

integration and evaluation activities


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Develop a strategic plan for the business

Develop an acquisition plan related to the strategic plan (Acquisition plan)

Search candidates for acquisitions (search)

Screen & prioritize potential candidates ( Screen)

Initiate contact with the target ( First contact)

Refine valuation, structure the deal, perform DueDiligence,and develop financing plan( Negotiation)

Develop plan for integrating the acquired business (integration plan)

Obtain approvals, resolve post closing issues (closing) Implement post- closing integration ( Integration)

Conduct the post-closing evaluation of acquisition(Evaluation)


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Due Dil igence process

Due Diligence, with reference to M&As, is the process ofexamining all aspects of the company, including

manufacturing, financial, commercial, legal, tax, IT

systems, regulatory issues, as well as undertaking issues

related to IPR, environment and other factors. It is done to

investigate and evaluate if it is worth pursuing a target ( and

at what price). It also aids in checking/validating the

information on the target company on all important

aspects, as disclosed by it to the acquirer.

The process of due diligence helps in valuing andnegotiating deals in an effective manner. It minimizes to

a great extent, risk of adverse surprises for the acquiring

company , post acquisition of the target company.


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Industry Life Cycle and Merger Types

Introduction stage: Newly created small f i rmsarebought out ( are targets) by large firms, whothemselves may be in mature or decliningindustry.These result in related or conglomerate mergers. The

smaller firm may not have financial capacityto

grow the business or the capability to handletheincreasedscale. Horizontal mergers betweensmaller firms may also occur, topool management /capital resources.

Exploitation / Growth stage: Nature of mergers aresimilar to those during introductory stage. Theimpetus is reinforced by more visible indications of

prospective growth& profit and higher capitalrequirements.


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Maturity stage: mergers are for economies

of scalein production, marketing , R&D to

match low cost / price performance of other

domestic or global firms

Decline Stage: Horizontal mergersareundertaken for survival, vertical mergers

are taken to increase efficiency/ profit.

Concentric mergers provides opportunitiesfor synergy and carry over


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LBO ( Leveraged buyout)one method offinancing acquistions

Leveraged buyout means mobilizing borrowed fundsbased on the security of assets and cash flows of the

target company ( before its takeover) and using those

funds to acquire the target company.

Four typical steps in a LBO are:a. Incorporation of a private /wholly owned company to act as a

Special Purpose Vehicle ( SPV) for acquisition of a target

company

b. Mobilization of borrowed funds in the SPV, based on the

security of assets and cash flows of the target company ( beforeits take over)

c. Acquisition of the entire or near entire share capital of the target

company.


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Use of LBO by I ndian companies

For domestic Acquisitions in India, LBOs are not practiced,since Indian banks are reluctant to lend money for LBO.

Indian companies have successfully resorted to LBO for

overseas Acquisitions.

The first major LBO was the acquisition of Tetley of UKby Tata Tea in early 2000. Acquisition of Corus Plc by

Tata Steel was also a case of LBO.

Management Buyout

When the professional management or non-promoter of acompany carries out leveraged buyout of the company from

its promoters.


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d. Finally, merger of the target company into theSPV immediately or after sometime. This last

step in the Leveraged buyout has two effects

It brings the assets of the target company and the

loan taken by the SPV into one balance sheet bywhich the lenders security no more remains a third

party security

It makes the target company go private i.e., the

target company gets unlisted.


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Reasons for cross border mergers & acquisitions

Growthinvest in faster growing economy

, get scale Technologyto exploit its technology or get access

Government Policyenvironmental & otherregulations can delay build new facilities

Differential labour costs, productivity Source of raw materials / inputshelps vertical

mergers

Learning

Cross border M&A most in automobiles, oil,Telecom, FMCG, Pharma, banking, entertainmentetc.


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Blue Print for Integrating Acquisition..

Integrationis a crucial part of success of aMergers & Acquisitions.

Study by Booz-Allen Hamilton found that successof M&A has the maximum dependenceon the

firms pre- and post-integration strategyand theability to act quickly.

An eff icient integrationbrings unification of thestrategies, policies& proceduresof merging

companies. An ineff icient integrationstrategyleads to ineff icient operations, communicationgaps, clashes in cul tureand leadership that preventthe merging companies from realizing full

potential.


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At the early stagesof negotiations most attention

needs to be paid to the business portfoliobut asthe deal advances strong focus on people &processesmust be paid.

Once the deal closes, the new the new entity must

settle the uncertaintyabout who is going to reportto whom and who is responsible for what.

Once an acquisition has been announced, the firmmust try to have the management structurecompletely laid out. The work of integrationshould really start when the firm is planning theacquisition.


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Once deal closes, new management team &structure must be put in place andannounced , to minimize risk of loss keyemployeesand other stake holders.

Loss of employee focus on external aspectsshould be avoided.

Right people should be appointed in the

new management structure. A capablemanager should be made in charge of theover all integration process.

Strategic Reasons for M&A Value Creation


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Strategic Reasons for M&A Value Creation

Sales growth, operating profit margins, workingcapital , fixed capital investments, and cost of

capital can be value drivers. These can be relatedto Porters generic strategies.

Value created through a merger depends on thenature of the deal that has been struck as well as the

integration process. A wrongly conceived merger will fail, no matter

how good the integration process; similarly a dealbased on sound logic might result in failure if the

integration process is poor. Often financial & legal aspects of M&A is given

due attention but human sides are not givenadequate timely attention.


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Reasons for M&As failing to achieve objectives

Reasons could be one or more combinationof

factors such as Payment of high price: dilutes future earnings

Overestimated synergies:synergies of cost reduction,working capital reduction, increasing revenue, investmentintensity may be over estimated

Inconsistent strategy: Inaccurate assessment of strategicbenefits of merger may lead to its failure

Inadequate due diligence: can cause buyer to inheritfinancial & business risks that may be very damaging

Clash of corporate cultures: lack of propercommunication, differing expectations, conflictingmanagement styles

Improper business fit:When product or services doesnot naturally fit into acquirers sales / distribution systemresulting in delays in integration


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Over Leverage: Acquirer financing through too

much debt. A well planned capital structure iscritical for successful merger.

Boardroom split / tussle: When target companysrepresentation is substantial, compatibility of

directors following the merger is important Regulatory delay: Announcement of a merger is adislocating event for employees, customers /suppliers of one or both companies. It is crucial tohave detailed plans to deal with potential problems

immediately following announcement. Regulatorydelays increase risk of substantial deter iorationof business operations.


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HP and Compaq Merger

Reason for merger: economies of scale in PCs,$2.5 b in cost synergies

Price Reaction at Announcement: HP sharedeclined by 19%, Compaq declined by 10%

Merger Process Private Activity: CEOs have initial discussion (6/2001),

Extensive business due diligence (6/2001), McKinseyAccenture retained by HP Compaq

Retain financial advisers (7/2001), Goldman Sachs SalomonSmith Barney appointed by HP Compaq

Board approves merger ( 9/2001)


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Public Activity:

Joint Press release ( 9/3/2001)

Walter Hewlett opposes (11/5/2001)

Packard Foundation opposes (12/8/2001)

Approval from FTC (3/7/2002) Compaq holders approve (//002

HP holders formally approve 5//20002)


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Motives for Divestiture..

A divestiture is a sale of a part or a division of acompany to a third party for cash or securities or

both. Two main reasonsfor divestitures are The assets to be divested are worth more as part of the

buyers organizationthan as part of the sellers

The assets are a drag on other profitable operations ofthe seller

Divestitures will not yield any gains unless theassets are sold for more than its present value.

However, in certain circumstances it may beadvisable to divest even without direct monetarygain.


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Some of the main reasons for divesting are

Efficiency gains & Refocus

Declining profitability of some business /

getting rid of unprofitable business

Information Effects : announcement ofdivestiture is seen as a change in investment

strategy or in operating efficiency

Wealth transferTax reasons

strategic alliance jv m&a dec14

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