Creating Value Through External Collaboration

1. Creating Value Through External Collaboration

2. Combinations of Means and Forms of Diversification Forms VERTICAL HORIZONTAL CONCENTRIC Phillip Morris buys Miller Brewing to diversify out of the cigarette business. TimeInc. acquires Warner Communication, creating a vertically integrated entertainment business. IBM purchased the assets of lotus corporation to expand its presence in the software industry. ACQUISITIONS Dow Chemical and Corning Glass create joint venture, more profitable than either parent. Cetus,a leading firm in the biotechnology field, teams up with larger corporations which provide needed capital. GE and Boeing are considering an alliance to produce the next generation 777 engine. STRATEGIC ALLIANCES Means Lockheed’s plans for a new satellite system are part of a strategy to grow by loading assets into a new telecom unit. Humana develops a full line of health care services, vertically integrating across businesses. 3M generates more than 25% of revenues from newly developed products. (5 years) INTERNAL DEVELOPMENT Mergers and Acquisitions Dr. George H. Webster

3. Mergers and Acquisitions Mergers and Acquisitions Dr. George H. Webster

4. Financial Transactions • Operating changes • New controlling shareholder • New board of directors • Change in business strategy Mergers and Acquisitions Dr. George H. Webster

5. Who Buys? • An operating company • A group of managers • A group of financial investors Mergers and Acquisitions Dr. George H. Webster

6. Objective To increase the per-share value of the acquirer • Long term • Discounted cash flows Mergers and Acquisitions Dr. George H. Webster

7. Merger and Acquisition Types • Horizontal • Vertical • Congeneric • Conglomerate Mergers and Acquisitions Dr. George H. Webster

8. Valuation of an Acquisition Candidate Mergers and Acquisitions Dr. George H. Webster

9. Value to Parties to the Transaction • Value to Buyer • Discounted present value of cash flows • Value represents maximum price • Value to Seller • Similar discounted cash flow analysis • Value may be lower for seller Mergers and Acquisitions Dr. George H. Webster

10. Merger Analysis Using NPV • Identify cash flows • Adjust for synergy's • Calculate PV- risk adjusted discount rate • Add market value of tax shield • Adjust for side effects • Subtract outstanding debt • Acquire with cash/securities Mergers and Acquisitions Dr. George H. Webster

11. A Merger Exercise High Tech Corporation Acquires APEX Company Mergers and Acquisitions Dr. George H. Webster

13. A View of Merger Analysis (Millions of Dollars) Change in Stockholders’ Wealth ($) Apex (Target) Hightech(Acquirer) 0 Price Paid for Target ($) $92.8 $62.5 Bargaining Range = Synergy

14. The Ford-Volvo Merger • Bought Volvo’s Car Business for $6 billion • Worldwide sales now 7.2 million units • Ford will achieve three goals; boost market share, fill a hole in the lineup, gain momentum in battle with G.M. • Volvo forecasts 200,000 units sold in U.S. by 2001 • Ford will now compete in the $30,000-$40,000 range • Analysts see only six major players by 2010

15. First Union- CoreStates • Takeover was a $19.7 Billion deal • CoreStates 1997 net income - $830 million • First Union forecast $258 Million savings in after tax expenses from synergy • In 1998 FUC missed goal by $50 Million • Payback period is about 18 years- Does this make sense? • Why else spend that much money? • Expand into the Northeast • Capture CoreStates investment banking business • Position itself to merge with another large bank (Chase Manhattan)

16. Strategic Alliances An Alternative to Mergers and Acquisitions Strategic Allinaces Dr. George H. Webster

17. Creating Value Through Strategic Alliances • Mergers and alliances are not substitutes for each other • For each situation there is a best structure Strategic Alliances Dr. George H. Webster

18. Global Logic of Strategic Alliances • National identity of products has disappeared - markets not defined by geographic borders • Dispersion of technology • The importance of fixed costs Strategic Alliances Dr. George H. Webster

19. Strategies for Entering Foreign Markets High Subsidiary Typical Direction of Evolution Joint Venture Low Level of investment at Risk Franchising Licensing Exporting None None Low High Ownership and Control of Foreign Operations

20. Advantages and Disadvantages of Different Entry Modes Entry Mode Advantages Disadvantages Exporting Ability to realize location and experience-curve economies High transport costs Trade barriers Problems with local marketing agents Licensing Lack of control over technology Inability to realize location and experience curve economies Inability to engage in global strategic coordination Low development costs and risks. Franchising Low development costs and risks Lack of control over quality Inability to engage in global strategic coordination Strategic Alliances Dr. George H. Webster

21. Advantages and Disadvantages of Different Entry Modes Entry Mode Advantages Disadvantages Joint Ventures Lack of control over technology Inability to engage in global strategic coordination Inability to realize location and experience economies Access to local partner’s knowledge Sharing development costs and risks Political acceptability High costs and risks Wholly owned subsidiaries Protection of technology Ability to engage in global strategic coordination Ability to realize location and experience economies Strategic Alliances Dr. George H. Webster

22. Creating Value Through Strategic Alliances • The potential for merger synergy is greatest where both partners have significant overlapping geographic positions. Important sources of synergy are: • Consolidation on a national basis • Improving skills transfers across borders • By contrast strong overlapping geographic markets frequently suggest trouble for strategic alliances

23. Creating Value Through Strategic Alliances • Keys to success in alliances are complementary activities and well-matched functional strengths • Keys to success in M.&A. are often overlapping activities and skills • In cross-border M.&A. much of the value is based on sharing skills, products and customers across national borders Strategic Alliances Dr. George H. Webster

24. Advantages of Global Strategic Alliances • Facilitates entry into a foreign market • Share costs and risks associated with development of new products or processes • Bring together complementary skills and assets that neither company could easily develop on its own • Might help the company set technological standards for its industry

25. Disadvantages of Global Strategic Alliances • Give competitors a low cost route to gain new technology and market access Strategic Alliances Dr. George H. Webster

26. Choosing Partners • Alliance partners should be complementary in products, geographic presence or functional skills they bring to venture • Complementarity between technology partners Strategic Alliances Dr. George H. Webster

27. High-Tech Alliances Driven by Economic Factors Increasing development cost Shorter product life-cycles Speed new product introduction Develop upstream technology Building new businesses/ introducing new products Leapfrog generation of product technology Increasing attractiveness of strategic alliances Achieve market penetration Increase capacity utilization Improving economics of existing businesses Fill product line gaps Exploit economies of scale Increasing cost pressure Globalization

28. Final Thoughts on Strategic Alliances • Expanding existing businesses into new geographic regions • Acquisitions successful in building core business in existing geographic market • Alliances work well for moving into new businesses Strategic Alliances Dr. George H. Webster

29. Final Thoughts on Strategic Alliances • Equal strength partners more likely to be successful • Autonomy and flexibility • Issue of ownership should be separated from managerial control • Realize that joint venture fill intermediate-term needs but may mortgage long-term global future Strategic Alliances Dr. George H. Webster

30. Pirelli-Cooper- a Strategic Alliance Example • Pirelli designated Cooper as exclusive distributor of Pirelli tires in N. A. • Cooper supplies tires for the replacement market • Cooper needs a major brand to complement its own • Pirelli gives Cooper a “ tier one” product (meets O.E.M. standards) • Cooper can now supply a complete line of tires • Pirelli will use Cooper’s strong dealer relationships in U.S.

31. “Let’s Make a Deal”- A Proposed Strategic Alliance • General Electric’s contribution: • G.E. will invest $500 million to develop an enlarged version of the GE90 (777) • The engine will have a 5,000-pound thrust margin over the competition • G.E. Capital will finance 747 sales, either through lease or sale in Asia • Boeing’s contribution: • Boeing must proceed to develop the 777 (by 2003) • Cost of development will be at least $1 Billion • Boeing must make G.E. the sole engine supplier

32. “Let’s Make a Deal”- A Proposed Strategic Alliance • General Electric receives: • $20 Billion contract from Boeing • Engine sales for 20 years • Approximately 20 per cent return on 747 sales/lease • Boeing receives: • Exclusive use of an engine that which will make the 777 competitive with the Airbus A340 • Financing help with the sale of 747’s (critical in Asia)