Chapter 10 Studying Mergers and Acquisitions

1. Chapter 10Studying Mergers and Acquisitions

2. 1 • Explain the motivations behind acquisitions 2 • Explain why mergers and acquisitions are important vehicles of corporate strategy 3 • Identify the various types of acquisitions 4 • Outline the alternative ways to integrate acquisition and explain the implementation process OBJECTIVES

3. MERGER vs. ACQUISITION • A • B • C • The consolidation or combinationof one firm with another • Merger + • A • B • A • The purchase of one firm by another so that ownership transfers • Acquisition + • The “merger”of Daimler with Chryslerin 1997 is considered by manyto have been an acquisitionin disguise

4. MOTIVES FOR MERGERS AND ACQUISITIONS • Managerial self-interest • Hubris • Synergy • Sometimes termed “managerialism” • Managers can conceivably make acquisitions – and even willingly overpay for them – to maximize their own interests at the expense of shareholder wealth • Managers can make mistaken valuations • Managers may have unwarranted confidence in their valuations and their ability to create value due to pride, over-confidence, or arrogance • Managers may believe that the value of the firms combined can be greater than the sum of the two independently • Reduced threats • Increased market power and access • Realized cost savings • Increased financial strength • Sharing and leveraging capabilities

5. Arenas • Economiclogic • Staging • Vehicles • Differentiators M&A – A VEHICLE THAT IMPACTS ALL ELEMENTS OF THE STRATEGY DIAMOND • M&A and the Strategy DiamondWhile mergers and acquisitions are explicitly vehicles of strategy, they have major implications for arenas, staging, and economic logic as well

6. US ACQUISITION ACTIVITY • Value of transactions, US$, 2003 • Number of transactions • Value of transactions($, 2003) • No. of transactions

7. 1972 • 1994 • 1997 • 2000 UPs AND DOWNs AT SNAPPLE 1` • In 1972, Leonard Marsh, Hyman Golden, and Arnold Greenberg founded a business called the Unadulterated Food Corporation and began selling juice in Queens, NY. The name Snapple was coined while trying to develop an apple soda. • In 1987, Snapple introduced iced teas with fun names and flavors and enlisted controversial radio personalities Howard Stern and Rush Limbaugh to promote them. • Cadbury Schweppes buys Snapple from Triarc for $1.45 billion. Snapple is now part of Cadbury’s very successful America’s Beverage division, which includes 7Up, Dr. Pepper, Mystic, and Mott’s juices, among other brands. • After great success,Snapple is sold to Quakerfor $1.8 billion • Less than three years later, Quaker throws in the towel and sells Snapple for $300 million to Triarc

8. BENEFITS AND DRAWBACK OF ACQUISITION OVER INTERNAL DEVELOPMENT • More expensive, all at once • Inherit adjunct businesses to run or divest • One-time, all-or-nothing decision • Potential for organizational conflict + • Speed • Critical mass • Access to complementary assets • Reduced competition

9. CLASSIFICATION OF ACQUISITIONS • Product/MarketExtension • OvercapacityM&A • Industry Convergence • Roll-up M&A • M&A as R&D • Example • DaimlerChryslermerger • Service Corporation International’s more than 100 acquisitions of funeral homes • Pepsi’s acquisition of Gatorade • Intel’s acquisitions of dozens of small, high tech companies • AOL’s acquisition of Time-Warner • Objectives • Eliminating capacity, gaining market share, and increasing efficiency • Efficiency of larger operations (e.g., economies of scale, superior management) • Synergy of similar but expanded product lines or geographic markets • Shortcut to innovation by buying it from small companies • Anticipation of new industry emerging; culling resources from firms in multiple industries whose boundaries are eroding • Percent ofall M&A deals • 37% • 9% • 36% • 1% • 4% Source: J.L.Bower, “ Not All M&As Are Alike – and That Matters,” Harvard Business Review 79: 3 (2001), 92-101

10. THE ACQUISITION PROCESS • A process perspective • Results • Acquisitionintegration • Justification due diligence, negotiation • Idea • Decision-makingprocess problems • Integration process problems

11. ACQUISITION SCREENING • “Soft-fit” acquisition screening by Cisco Systems • Screening criteria • Means of achieving criteria • Offer both short- and long-term win-wins for Cisco and acquired company • Have complementary technology that fills a need in Cisco’s core product space • Have a technology that can be delivered through Cisco’s existing distribution channels • Have a technology and products that can be supported by Cisco's support organization • Able to leverage Cisco’s existing infrastructure and resource base to increase its overall value • Share a common vision and chemistry with Cisco • Have a similar understanding and vision of the market • Have a similar culture • Have a similar risk-taking style • Be located (preferably) in Silicon Valley or near one of Cisco’s remote sites • Have a company headquarters and most manufacturing facilities close to one of Cisco's main sites

12. HOLDING • Need for strategic interdependence • Low • High • High • Preservation • Symbiosis • Need for organizational autonomy • Low • Holding • Absorption • The acquiring company allows little autonomy - yet does not integrate the target into its businesses, often imposing its own, extensive accounting and control systems (e.g., Bank One’s acquisitions of local banks )

13. ABSORPTION • Need for strategic interdependence • Low • High • High • Preservation • Symbiosis • Need for organizational autonomy • Low • Holding • Absorption • Acquiring company completely absorbs the target company. If the target company is large, this can take time.

14. PRESERVATION • Need for strategic interdependence • Low • High • High • Preservation • Symbiosis • Need for organizational autonomy • Low • Holding • Absorption • The acquiring company makes very few changes to the target, and instead learns from it in preparation for future growth (e.g., many of Wal-Mart’s early international acquisitions)

15. SYMBIOSIS • Need for strategic interdependence • Low • High • High • Preservation • Symbiosis • Need for organizational autonomy • Low • Holding • Absorption • The acquiring company integrates the target in order to achieve synergies - but allows for autonomy, for example to retain and motivate employees. This is possibly the most difficult to implement (e.g., Cisco's acquisitions which cost the firm $1 million per employee on average).

16. It’s a continuing process, not an event • Start the integration process long before the deal is closed. • Integration management is a full-time job • Many successful acquirers appoint an “integration manager” becauseintegration is too much work for acting managers to add to their workloads. • Key decisions should be made swiftly • Speed is of the essence because of the cost, distraction, and time value • of money. • Integration should address technical and cultural issues • Managers often focus on technical issues only. This is a mistake. KEY LESSONS FOR IMPLEMENTING M&As

17. 1 • Explain the motivations behind acquisitions and show how they’ve changed over time 2 • Explain why mergers and acquisitions are important vehicles of corporate strategy 3 • Identify the various types of acquisitions 4 • Outline the alternative ways to integrate acquisition and explain the implementation process SUMMARY