Chapter 10 studying_mergers_and_acquisitions_

Chapter 10Studying Mergers and Acquisitions

Zürich, Dec. 1th 2010

Prof. Rolf Jufer([email protected])

MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer

MERGERS AND ACQUISITIONS

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OBJECTIVES

Explain the motivations behind acquisitions and show how they’ve changed over time

1

Explain why mergers and acquisitions are important vehicles of corporate strategy

2

Identify the various types of acquisitions 3

Understand how the pricing of acquisitions affects the realization of synergies

4

Outline the alternative ways to integrate acquisition and explain the implementation process

5

Discuss the characteristics of acquisitions in different industry contexts

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THE eBAY-PAYPAL ACQUISITION

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MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 4




The partnership made sense … … but would it work?

Rely on transaction-based revenue

No inventory or warehousing

No sales force

Can we recoup the $250 millionpremium we paid with savingsand revenue growth?


THE eBAY-PAYPAL BUSINESS MODELS

eBay business model

eBay

BuyerSellerContract and

payment occur between buyer

and seller

PayPal business model

PayPal

PayeePayer

eBay revenue comes from sellers paying auction posting fees

PayPal’s revenue comes from float in the personal accounts and fees for pre-mier and business accounts


OTHER EXAMPLES: ORACLE BUYS SUN

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• On April 20, 2009, Sun and Oracle Corporation announced that they entered into a definitive agreement under which Oracle will acquire Sun for $7.4 billion. Sun shareholders approved the acquisition on July 16, 2009. As of November 2009 the acquisition is pending regulatory approvals.

• On November 6, in its 10-Q filing for the 1st quarter of the 2010 fiscal year, Sun announced 25% total revenue decrease, compared to the 1st quarter of the previous year, due to "economic downturn, the uncertainty associated with our proposed acquisition by Oracle, increased competition and delays in customer purchasing decisions".


OTHER EXAMPLES: ACQUISITION OF SWISS AIR

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OTHER EXAMPLES: NOVARTIS MERGER

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MERGER VS. ACQUISITION

Merger

Acquisition

A

A

B

B

C

AThe purchase of one firm by another so that ownership transfers

The consolidation or combinationof one firm with another

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WHAT‘S ABOUT THE ORANGE / SUNRISE DEAL?

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http://www.sunrise.ch/medienmitteilungenatt.htm?mediaattid=6110&filename=PR_Switzerland_Orange_Sunrise_251109_EN.pdf

France Telecom and Denmark’s TDC are set to merge their Swiss operations — Orange Switzerland and Sunrise, respectively — in a move that would create a powerful rival to the market leader –Swisscom. France Telecom said it will pay 1.5 billion EUR to TDC to become a 75% shareholder in the combined entity, while TDC will hold the remaining 25%.

The new firm will have approximately 3.4 million mobile and 1.1 million fixed and broadband customers, accounting for a 38% share of the Swiss mobile market and 13% of the fixed broadband connections. At the same time, the merger is expected to generate synergies to the tune of 2.1 billion EUR.

According to France Telecom’s Gervais Pellissier: “The planned merger of Sunrise and Orange Switzerland marks a new significant step in the long-term investment by France Telecom-Orange in Switzerland. Following the UK joint venture between Orange and T-Mobile (NYSE: DT), France Telecom completes another major in-market consolidation, consistent with its M&A policy.”

At the moment, Swisscom dominates the Swiss mobile market with an estimated 62% marketshare (5.5 million connections) in Q3 2009. Sunrise holds the second position with 1.9 million users (a 21% market share), while Orange is third with 1.6 million users (18%).

http://www.sunrise.ch/medienmitteilungenatt.htm?mediaattid=6110&filename=PR_Switzerland_Orange_Sunrise_251109_EN.pdf�


MOTIVES FOR MERGERS AND ACQUISITIONS

Sometimes termed “Managerialism”, manager can conceivably make acquisitions-and even willingly overpay for them-to maximize their own interests at the expense of shareholder wealth

Managers may make mis-taken valuation and have unwarranted confidence in their valuation and in their ability to create value because of 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

Managerial self-interest Hubris Synergy

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M&A – A VEHICLE THAT IMPACTS ALL ELEMENTS OF THE STRATEGY DIAMOND

M&A and the Strategy DiamondWhile mergers and acquisition are explicitly vehicles of strategy, they have major implications for arenas staging, and economic logic as well

Economiclogic

Arenas

VehiclesStaging

Differentiators

Source: Adapted from Hambrick and Fredrickson, “Are You Sure You Have a Strategy?” Academy of Management Executive 15:4 (2001) 48-59

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TOP DEALS 2008 BY VALUE IN SWITZERLAND

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Source: http://www.kpmg.ch/docs/KPMG_MA_Yearbook09.pdf


19721`

In 1972, brothers-in-law Leonard Marsh and Hyman Golden and Arnold Greenberg, Marsh’s childhood friend, founded a business called the Unadulterated Food Corporation and began selling juice in Queens. 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 (2) 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 the very successful America’s Beverage division, which includes 7up, Dr. Pepper, Mystic, and Mott’s juices, among other brands. Has Snapple found its home?

Fewer than three years later, Quaker throws in the towel and sells Snapple for $300 million to Triarc

UPs AND DOWNs AT SNAPPLE

1994 1997 2000

After sizzling success,Snapple is sold to Quakerfor $1.8 billion

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BENEFITS AND DRAWBACK OF ACQUISITIONS OVER INTERNAL DEVELOPMENT

• Speed • Critical Mass• Access to complementary

assets• Reduced competition

• Move expensive• Inherit adjunct businesses • Cannot spread commitment over several

years (one-time, all-or-nothing decision)• Potential for organizational conflict

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CLASSIFICATION OF ACQUISITIONS

OvercapacityM&A Roll-up-M&A

Product/MarketExtension M&A as R&D

Industry Convergence

Example DaimlerChryslermerger

Service Corporation International more than 100 acquisitions of funeral homes

Pepsi’s acquisition of Gatorade

Intel’s dozens of acquisitions of small high tech companies

AOL’s acquisition 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 of geographic markets

Short cut 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

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THE SYNERGY TRAP

Acquisition premiums Create two problems for managers

Premiums increase the level of returns

the combined businesses must

extract

The longer it takes to implement performance

improvements, the more likely the

acquisition will fail


HOW WOULD YOU DO THAT? – PAYPAL ACQUISITION

eBay paida $250 million premium for PayPal, nowthey must earn that premium back

Years until synergies are implemented

Cost of capital

0

1

2

3

4

5

0.100

0.110

0.121

0.133

0.146

0.161

10%

0.150

0.173

0.198

0.228

0.262

0.302

15% 20%

0.200

0.240

0.288

0.346

0.415

0.498

• “How much incremental net income must you generate if you implement synergies in two years?

• What if they take fiveyears to implement?


THE ACQUISITION PROCESS

Source: Adapted from P.C. Haspeslagh and D.B. Jemison, Managing Acquisitions: Creating Value Through Corporate Renewal (New York Free Press, 1991), 42

A process perspective

Idea

Justification due diligence, negotiation

Acquisitionintegration

Results

Decision-makingprocess problems

Integration process problems

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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 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

• Is 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

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ABSORPTION

Need for strategic interdependence

Need for organizational autonomy

High

Low

High

Preservation Symbiosis

Holding Absorption

Low

Acquiring company completely absorbs the target company. If the target company is large, this can take time (e.g., Franklin Quest’s acquisition of the Covey Leadership Center to create Franklin Covey)

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PRESERVATION



High

Low

High


Holding Absorption

Low

The acquiring company makes very few changes to the target , and instead learned from it in preparation for future growth (e.g., many of Wal-Mart’s early international acquisitions)

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HOLDING



High

Low

High


Holding Absorption

Low

The acquiring company allows little autonomy - yet does not integrate the target into its businesses (e.g., Bank One’s acquisitions of local banks )

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SYMBIOSIS



High

Low

High


Holding Absorption

Low

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)

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TIPS FROM PERRY AND HERD

Firms must study failed M&As as much as successes.

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Traditional due diligence is no longer sufficient. With M&A deals increasingly risky, there is more need for pre-deal planning.

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M&As AND INDUSTRY LIFE CYCLE

Introduction

M&As tend to be R&D and product-related

Growth Maturity

M&As tend to be for acquiring products that are proven and gaining acceptance

M&As primarily for dealing with over capacity in the industry

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M&As IN DYNAMIC CONTEXTS

Technological change

Cisco and Microsoft both use acquisitions to ensure they maintain their strong competitive positions

Demographic change

Geopolitical change

Trade liberalization

When the Tribune Company merged with Times-Mirror in 2000, it acquired Spanish-language “Hoy” to target the growing U.S Hispanic market

IBM divested its PC division to a Chinese company as that country emerges

Wal-Mart acquired Mexican retail giant, Cifra, in wake of NAFTA

Deregulation AT&T divested local operations into “Baby Bells” and set off a state of almost constant M&A

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REVIEW QUESTIONS

?1. What is an acquisition?2. Why would firms use acquisitions rather than create a new business

internally?3. What are the possible motives for acquisitions?4. What are the ways in which synergies can be created in acquisitions?5. How easy or difficult is it to achieve the alternative types of synergies?6. What are the various types of acquisitions?7. How do market-extension acquisitions and geographic rollups differ?8. Give examples of product extension, overcapacity, and R&D

acquisitions?9. What is an acquisition premium?10.How can you calculate the synergies that must be extracted from an

acquisition with a given premium?11.How do acquisitions tend to be used in different stages of the industry

life cycle?

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GROUP ACTIVITY

Pick a firm of interest to your group. Identify potential acquisition candidates. Explain why these companies would make sense as an acquisition target. Evaluate and describe possible implementation barriers to this acquisition.

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GROUP ACTIVITY

Pick a firm of interest and peruse its annual reports over a 5- to 10-year period. Assess the information presented on M&As in the annual reports.

Do you see any explicit mention of the link between strategy formulation and implementation with respect to the acquisition mentioned in the annual reports? (As a starting place, see the chairman’s letter to the shareholders.)

What are the before-and-after scenarios that you find regarding the M&As?

Chapter 10 studying_mergers_and_acquisitions_

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