International Strategy and Organization

1. International Strategy and Organization Internationalization through Mergers and Acquisitions 0447092 ALVES, João 0447093 BORREGO DO VALE, João 0447094 LAGINHA, Luís 0447095 NUNES, Bruno

2. Overview - 1 • Alliances vs. Acquisitions • The Value of M&A Strategies • Performance Implications of M&A • Reasons for M&A • Sustained Competitive Advantage • Implications for Bidding Firm Managers • Implications for Target Firm Managers

3. Overview - 2 • Decision of Internationalization • Entry Modes • Problems in Entry Modes • Performance of M&As • Synergy Realization of M&As • Case Study: “Mannesmann and Vodafone: The unfriendly takeover”

4. Alliances vs. Acquisitions • Alliances allow simultaneous and fast entering into multiple countries • Objective: achieve complementary capabilities or economies of scale • Do not have high risks of failure and high transaction costs

5. Alliances vs. Acquisitions • Acquisitions allow for a greater rationalization than alliances • In alliances all decisions must be made by consensus among the partner firms • Alliances are transient in nature and must remain reversible

6. Alliances vs. Acquisitions • Alliances are inherently less efficient than acquisitions • Future alliances might be formed as a first step toward a merger • Alliances make it possible to avoid the culture shock in the wake of an acquisition

7. The Value of M&A Strategies • The unrelated case • NPV(A+B) = NPV(A) + NPV(B) • P = NPV(A+B) – NPV(A) • Only generates normal economic profit • The related case • NPV(A+B) > NPV(A) + NPV(B)

8. M&A: The Related Case • FTC Categories • Vertical Merger • Horizontal Merger • Product Extension Merger • Market Extension Merger • Conglomerate Merger • Lubatkin (1983): • Technical economies • Pecuniary economies • Diversification economies

9. M&A: The Related Case • Jensen and Ruback (1983): • To reduce production or distribution costs • Through economies of scale • Through vertical integration • Through the adoption of more efficient production or organizational technology • Through the increased utilization of the bidder’s management team • Through a reduction of agency costs by bringing organization-specific assets under common ownership

10. M&A: The Related Case • Jensen and Ruback (1983) (cont.): • Financial motivations • To gain access to underutilized tax shields • To avoid bankruptcy costs • To increase leverage opportunities • To gain other tax advantages • To gain market power in product markets • To eliminate inefficient target management

11. Performance Implications of M&A • The more strategically related bidding and target firms are, the more economic value M&A create • Economic value appropriated by the owners of the target firm • Why do managers of bidding firms continue to engage in M&A strategies?

12. Reasons for M&A • Ensuring survival • Free cash flow • Agency problems • Managerial hubris • The potential for above-normal profits

13. Sustained Competitive Advantage • To generate above-normal profits • Valuable, rare, and private synergies between bidding and target firms • Valuable, rare, and costly-to-imitate synergies between bidding and target firms • Unexpected valuable synergies between bidding and target firms

14. Implications for Bidding Firm Managers • Search for valuable and rare synergies • Keep information away from other bidders • Keep information away from targets • Avoid winning bidding wars • Close the deal quickly

15. Implications for Target Firm Managers • Seek information from bidders • Invite other bidders to join the bidding competition • Delay but do not stop the acquisition

16. Decision of Internationalization • Knowledge Clusters • Interrelated groups of firms • Technology leading firms • Highly skilled labor • In urban areas or regions nearby • Incentives to not enter into • Knowledge Spillovers • Locals may imitate know-how

17. Entry modes • 3 Entry Type Modes • Greenfield Investment • Joint Venture • Acquisition • Greenfield Investment (79%) • Acquisition (15%) • Joint Venture (6%)

18. Assets • Acquisition • Problem if acquired have a high ratio of undesired resources • Advantage to ‘plug into’ a local firm • Greenfield Investment • Gradually develop its own network • Joint Ventures • Only have access to selected assets

19. Problems in Entry Modes • Assets • Absorptive Capacity • Social Entry Barriers • Local Labor Market • Institutions and Membership

20. Problem of Absorptive Capacity • Long process of constructing code books • ‘Interpreter’ for the firm • Transfer knowledge from local do global • Preferred should be Acquisition

21. Problem of Social Entry Barriers

22. Local Labor Market • Condemned by local firms – firms should avoid the raise social barriers • Personnel may want to quit after acquisition • Joint Venture may be more costly than acquisition

23. Institutions and Membership • Specialized firms and educations and research institutions • Creation of shared codebooks • Same problem as in the social entry barriers

24. Performance of M&As • Strategic Management • Economics • Finance • Organizational Research • Human Resources Management

25. Synergy Realization of M&As M&As success is calibrated by the degree of synergy realization • Combination potential • Organizational integration • Lack of employee resistance

26. Achieving Synergies through Combination Potential • “Economies of sameness” – similar operations • “Economies of fitness” – different, but complementary operations • Operational synergies • Administration synergies • Managerial synergies • Financial synergies

27. Achieving Synergies through Organizational Integration • Degree of interaction (the greater it is, the greater the degree of synergy realization) • Coordinative effort to improve the quality of interaction (with special integrators, transition teams and preplanning • Little, or poorly executed, interaction and coordination are unlikely to produce substantial joint benefits

28. Employee resistance, undermining synergy realization • M&As affect career plans • M&As create appearance of psychological problems such as: • “We versus they” antagonism • Condescending attitudes • Distrust, Tension and Hostility • Grave cultural problems • Occur more with similarities in operations than in differences

29. Other important factors of synergy realization • Management style similarity • Attenuates employee resistance • Cushions the degree of change and enhances cooperation • Cross-border Combination • Impede the interaction and coordination because of country differences • Culture clashes promoting employee resistance • May speed new markets access and promote globalization synergies • Relative Size • Insufficient managerial attention to smaller targets • Positively associatedOrganizational integration

30. Case Study • Mannesmann and Vodafone – The Unfriendly Takeover • Vodafone – focus on providing mobile telephone services • Mannesmann – aimed to become the European leader in integrated telecommunications

31. Main objectives • Achieving a bigger scale that would stimulate cost reduction • Achieving technological leadership • Achieving a significant presence in continental Europe

32. The takeover - 1 • Vodafone’s expansion focused exclusively on mobile communications • Acquiring Mannesmann would give a quick access to the German telecommunication market and foster the fast growing strategy

33. The takeover - 2 • Friendly start – Vodafone starts negotiating with Mannesmann • Defensive Tactics – Mannesmann acquisition of Orange • Vodafone’s response

34. The takeover - 3 • The final bid • 53.7 Vodafone shares for each Mannesmann share (266.40 € each; total of 120 billion €)

35. Synergy effects • Customer base from 28 million to 59 million • Enhancement of logistics, marketing strategy, brand awareness and technological capacity and capabilities • Product development, based on technological innovation became the watchword

36. Questions and Considerations ???