Barney SMCA4 10

Chapter 10

Mergers and Acquisitions

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall.

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Mergers andAcquisitions Mergers & Acquisitions

The Strategic Management ProcessExternal Analysis Strategic Choice

Mission

Objectives

Strategy Implementation

Competitive Advantage

Internal Analysis

Which Businesses to Enter? Corporate Level Strategy

Vertical Integration DiversificationMode of Entry? Strategic Alliances Mergers & Acquisitions

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive

Advantage Barney & Hesterly

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Logic of Corporate Level Strategy AppliesCorporate level strategy should create value:1) such that the value of the corporate whole increases

2) such that businesses forming the corporate whole are worth more than they would be under independent ownership

3) that equity holders cannot create through portfolio investingCopyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive


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Mergers & Acquisitions DefinedMergers two firms are combined on a relatively co-equal basis

Acquisitions one firm buys another firm

the words are often used interchangeably even though they mean something very different

merger sounds more amicable, less threateningCopyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive


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Mergers & Acquisitions DefinedMergers parent stocks are usually retired and new stock issued name may be one of the parents or a combination one of the parents usually emerges as the dominant managementCopyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive

Acquisitions can be a controlling share, a majority, or all of the target firms stock can be friendly or hostile usually done through a tender offerAdvantage Barney & Hesterly

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Do Mergers and Acquisitions Create Value?The LogicUnrelated M&A Activity there would be no expectation of value creation due to the lack of synergies between businesses there might be value creation due to efficiencies from an internal capital market there might be value creation due to the exploitation of a conglomerate discount a corporate raider who buys and restructures firmsCopyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive


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Mergers & Acquisitions DefinedTypes of M&A Activity FTC Categories Vertical Horizontal Related Product Extension complementary products Market Extension complementary markets Unrelated Conglomerate everything elseAdvantage Barney & Hesterly

suppliers or customers competitors


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Do Mergers and Acquisitions Create Value?The LogicRelated M&A Activity value creation would be expected due to synergies between divisions economies of scale economies of scope transferring competencies sharing infrastructure, etc.



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Do Mergers and Acquisitions Create Value?The Empirical EvidenceResearch is based on stock market reaction to the announcement of M&A activity this reflects the markets assessment of the expected value of the merger or acquisition these studies look at what happens to the price of both the acquirers stock and the targets stock thus, we can see who is capturing any expected value that may be createdCopyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive


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Do Mergers and Acquisitions Create Value?The Empirical EvidenceM&A Activity creates value, on average, as follows:

Acquiring Firms no value created

Target Firms

value increases by about 25%

related M&A activity creates more value than unrelated M&A activity

M&A activity creates value, but target firms capture itCopyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive


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Do Mergers and Acquisitions Create Value?Expected versus Operational ValueApril 2000: Wells Fargo offers to acquire First Security Bank for about $3 billion ExpectedThe Deal: Stock values were: Wells Fargo: $43.69 First Security: $15.50 .355 shares of WF for each share of FS stock Wells Fargo: down $0.25 to $39.50 First Security: up $1.19 to $13.38 Stock Price 12/1999 $40.44 12/2000 $56.69 12/2001 $43.60 12/2002 $46.87 12/2003 $58.89 12/2004 $62.15Advantage Barney & Hesterly

Operational

Market Cap. $65.7 B $95.2 B $74.0 B $82.0 B $100.0 B $105.0 B10-11 11



Why is M&A Activity So Prevalent?If managers know that acquiring firms do not capture any value from M&As, why do they continue to merge and acquire? avoid competitive disadvantage avoid scale disadvantages

Survival

Free Cash Flow

cash generating, normal return investment



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Why is M&A Activity So Prevalent?If managers know that acquiring firms do not capture any value from M&As, why do they continue to merge and acquire?Agency Problems

managers benefit from increases in size managers benefit from diversification

Managerial Hubris

managers believe they can beat the odds



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Why is M&A Activity So Prevalent?If managers know that acquiring firms do not capture any value from M&As, why do they continue to merge and acquire? some M&A activity does generate above normal profits (expected and operational over the long run) Above Normal Profits

proposed M&A activity may satisfy the logic of corporate level strategy managers may see economies that the market cant see



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Competitive AdvantageCan an M&A strategy generate sustained competitive advantage? Yes, if managers abilities meet VRIO criteria1Managers may be good at recognizing & exploiting potentially value-creating economies with other firms Managers may be good at doing deals Managers may be good at bothAdvantage Barney & Hesterly

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Competitive AdvantageRecognizing and Exploiting Economies of ScopePrivate Economies Firm A Firm C Firm B Bidders Target Firm Cs recognized value is $10,000 Firm A sees value of $12,000 in Firm C Firm A can earn a profit of $2,000 only if the economy remains privateAdvantage Barney & Hesterly


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Competitive AdvantageRecognizing and Exploiting Economies of ScopeCostly-to-Imitate Economies Firm A if the economy between A & C is costly to imitate, it doesnt matter if other firms know Firm A can still earn a $2,000 profit10-17 17

Firm CFirm B Bidders Target




Competitive AdvantageRecognizing and Exploiting Economies of ScopeUnexpected Economies Firm A Firm C Firm B Bidders TargetAdvantage Barney & Hesterly

Firm C has a market value of $10,000 Firm A buys Firm C for $10,000 Firm C turns out to be worth $12,00010-18 18



Competitive AdvantageDoing the DealSearch for Rare EconomiesSeek Thinly Traded Markets Bidding Firms Perspective Limit Information to Other Bidders

Close the Deal Quickly

Limit Information to the Target

Avoid Bidding WarsCopyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive


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Competitive AdvantageDoing the DealSeek Information from Bidders

Target Firms Perspective

Invite Other Bidders to Join in Bidding Contest

Delay, But Do Not Stop the AcquisitionCopyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive


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Implementation IssuesStructure, Control, and CompensationM&A activity requires responses to these issues: m-form structure is typically used management controls & compensation policies are similar to those used in diversification strategies Managers must decide on the level of integration: target firm may remain somewhat autonomous

target firm may be completely integratedCopyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive


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Implementation IssuesCultural Differences high levels of integration require greater cultural blending cultural blending may be a matter of:

combining elements of both cultures essentially replacing one culture with the other integration may be very costly, often unanticipated

the ability to integrate efficiently may be a source of competitive advantageCopyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive


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SummaryM&A activity is a mode of entry for vertical integration and diversification strategies A firms M&A strategy should satisfy the logic of corporate level strategy M&A activity can create economic value at announcement, but target firms usually capture that value M&A activity can create value over the long term for the acquiring firmCopyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive


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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

Copyright 2012 Pearson Education, Inc. publishing as Prentice HallCopyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive


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Barney SMCA4 10

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