Corporate Strategy: Mergers and Acquisitions

1. Corporate Strategy:Mergers and Acquisitions Learning Objectives: Understand the types of mergers and acquisitions (M & A); how they create value; the success of M & A activity, according to Barney and Porter; motives for M & A, other than value creation for shareholders.

2. Means to Achieve Diversification

3. Types of Mergers and Acquisitions • Acquisition – bidding firm makes ‘tender offer’ for shares of target firm • Merger – two or more firms ‘come together’ by combining assets and stock • Friendly vs. hostile takeovers • Related vs. unrelated

4. FTC Categories of Mergers and Acquisitions • Vertical (backward and forward) • Horizontal • Product extension • Market extension • Conglomerate Which of these pertain to ‘related’ mergers and acquisition ?

5. Creating Value, According to Barney • Recall from Chapter 7: two conditions must hold for this strategy to produce value: • Valuable economies of scope • Stockholders cannot achieve these economies at a lesser-cost by themselves • Potential sources of value (related M & A) • Technical economies (scale / scope) • Exploiting market power (pecuniary) • Diversification economies (risk reduction) How can value be created in the case of unrelated M & A ?

6. M & A and Sustained Competitive Advantage … even if these ‘economies’ generate value, the bidding firm can gain a competitive advantage through M & A activity only when the market for corporate control is imperfectly competitive … When is this market imperfectly competitive ? Hint: consider the following assumptions of perfect competition: • Homogeneity • Costless entry and exit • Perfect and complete information • Atomicity & price taking • Equal access • Independence (of buyers and sellers)

7. Conditions of Imperfectly Competitive Marketfor Corporate Control • Target firm worth more to one bidder than another AND this knowledge is private • Target firm worth more to one bidder than another AND other bidders cannot easily imitate these “economies” • Inherent uncertainty and incomplete information results in unexpected surplus profits

8. M & A Activity and the VRIO Framework • Valuable – when ‘economies’ exist AND market for corporate control is imperfectly competitive • Rare – if the resources of the combined firm are unique or less than what’s needed to reach perfect competition • Imitable – if the resources of the combined firm are costly to duplicate • Organization – post M & A coordination and integration is essential; M-form structure; addressing operational, systems and cultural differences are key

9. Suggestions for Bidding Firms • Search for valuable and rare economies • Keep information private (from target and potential bidders) • Avoid bidding wars • Close the deal quickly • Operate in thinly traded markets Have your firms followed all of these suggestions ?

10. Suggestions for Target Firms • Seek information from bidders • Invite other firms to bid • Delay (but do not stop) the acquisition Have your target firms adopted any of these suggestions ?

11. Common Responses From Target Firms • Greenmail • Standstill agreements • Poison pills • Shark repellents • Pac Man defense • Crown jewel sale • Search for white knights • Create bidding auctions • Golden parachutes Tend to reduce shareholders’ equity Little effect on shareholders’ equity Tend to increase shareholders’ equity

12. Do Mergers and Acquisitions Create Value ? • Barney: • 25% increase in value for target firm • no increase for bidding firm. • Porter: • More than half of all related acquisitions are divested • Nearly 75% of all unrelated acquisitions are divested • No evidence of increased ROI for parent firm Are these findings at odds with each other ?

13. Possible Motives for Mergers and Acquisitions ? … if the bidding firm fails to generate value to its shareholders, why do we see so much M & A activity ? • Ensure survival • Free cash flow • Agency problems • Managerial hubris • Potential for above-normal profits