Seminar 7: Acquisition

Contents: 1. To understand the motives and types of

acquisitions

2. To understand the various stages that make up a typical acquisition process

3. To identify potential issues and remedies that might occur during the acquisition process

4. To identify and understand why successful acquisitions have certain attributes

©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

MERGERS, ACQUISITIONS, AND TAKEOVERS: WHAT ARE THE

DIFFERENCES?

MERGER Two firms agree to integrate their operations on a relatively co-equal basis

There are few TRUE mergers because one firm usually dominates in terms of market share, size, or asset value

ACQUISITION One firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio

©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

MERGERS, ACQUISITIONS, AND

TAKEOVERS: WHAT ARE THE DIFFERENCES?

TAKEOVER Special type of acquisition strategy wherein the target firm

did not solicit the acquiring firm's bid HOSTILE TAKEOVER Unfriendly takeover that is undesired by the target firm RATIONALE FOR STRATEGY Pre-announcement returns of hostile takeovers are largely

anticipated and associated with a significant increase in the bidder’s and target’s share price

Choice Of Entry Mode Is Influenced By The Level of Resources Committed By The Firm

Commitment of Resources High Low

Exporting Wholly Owned Subsidiary Licensing Strategic Alliance Acquisition

Characteristics -Does not require establishing operations in host country

Advantages - Easy to do, fast Disadvantages -High cost of transportation - little control - middle man required

Characteristics - Internal growth

Advantages - Full control - Potential for maximal returns Disadvantages - Slow - High costs and risks associated to being new to the country

Characteristics - Another firm purchases the right to manufacture and sell

Advantages -Low cost & risk Disadvantages - little control - Limited potential returns - Risk of foreign firm exploiting knowledge

Characteristics - Partnership with another firm to combine expertise

Advantages -Gain access to resources / expertise - Shared risk Disadvantages - Collaboration issues - Incompatible partners (conflict)

Characteristics - Buying over another firm to gain entry

Advantages -Quick access to new market - Greater control Disadvantages -Costly - Integration is complex and uncertain -Non-realization of synergy

An Understanding of the Foreign Market, Together with a Firm’s Resources and Capabilities Drives Entry Mode Choice

Acquisitions Provide Avenues To Accomplish Organizational Goals (I)

Situation

Organization seeks international diversification Organization requires new types of innovation and product development Organization seeks to diversify/control its revenue stream for various reasons (e.g. seasonality, geography, industry)

Goals

To overcome liability of foreignness & other entry barriers To develop new products and introduce them quickly and successfully into the market To remove fluctuations in revenue streams, develop new revenue streams and manage risk / achieve control

Internal Issues

Organization has no content expertise Organization has limited know-how or have met with road-blocks Not directly applicable

Acquisitions Can be Used to Attain Specific Organizational Goals

Action

Acquire established firm in host country with content knowledge (E.g. Singtel acquiring Optus) Acquire a firm with specific core knowledge or competencies (E.g. HP acquiring Indigo) Acquire a firm that provides new revenue streams, strengthen current revenue streams (e.g. Prudential acquiring Bache and Company)

Ability to Refocus

Improved Competencies Unrelated

Acquisition Reshaping

Competitive Scope /

Restructuring *

Acquisitions Provide Avenues To Accomplish Organizational Goals (II)

Acquisitions Can be Used to Achieve Broad Organizational Goals

Improved Economies

of Scale

Types of Acquisition

Vertical Integration

Horizontal Integration

Related Acquisition

The type of acquisition follows the reasons for the acquisition

Reasons for Acquisition

Enhance Market Power

Develop Competencies /

Capabilities

Improve Competitive

Position

Outcomes / Mechanisms for Success

Acquisitions are often done for broad strategic reasons

Cost / Revenue

Synergies

Increased control

Enhanced Bargaining

Power

Various mechanisms influence the success of an acquisition

Acquisition - Reasons Growth: 1. Increase size of the Pie

• Innovation • International (outside current coverage)

2. Increase Market Share • Market power – ‘ValueNet (or Value System) integration’ • Synergistic – scope and/or scale benefits

Risk: 1. “Baskets” – Portfolio Management, Asset Utilization 2. Environmental Uncertainties

• Resource Dependency • Competitive dynamics

Direction: 1. Vision, Mission, Strategic Intent – SWOT 2. Industry or Regulatory changes – Entry barriers

A Typical Acquisition Process Consists Of Several Key Stages

Identifying an organizational

goal

Identifying strategic options

Choosing the best option (Acquisition

in this chapter)

Due diligence

The Acquisition Integration

The Acquisition and Integration process normally occurs over a period of time. The acquisition is typically completed when control is effectively ceded over to the acquirer (deal terms are agreed upon) The Integration process is a complex process which integrates various aspects of the two firms according to a master plan of sorts. (Some companies might choose not to integrate systems, routines, etc)

• At this stage, specific or broad organizational goals are identified. E.g. The firm needs to enter into a foreign market, like China E.g. The firm needs to secure scarce resources such as raw materials E.g. The firm wants to obtain greater economies of scale in order to enhance competitiveness • Organizational goals and options are normally carried out together

Due diligence can include: - Understanding the fit between companies

- Proper valuation of the target firm

- Any useful knowledge prior to the acquisition (e.g. a previous alliance, contact)

• Pros and cons of each option are considered

• Specific mechanisms to accomplish goals are identified

• Potential issues and problems are identified

The Acquisition Process is an Extended Process which Entails Planning, as well as, Implementation Elements

Acquisitions Should Be Evaluated Carefully To Avoid Potential Issues (I)

Reason For Acquisition

Overcome entry barriers Reduce cost of new product development and increase speed to market Lower risk compared to developing new products Increased diversification / control revenue streams

Potential Problems In Achieving Success

• Inadequate evaluation of target • Integration difficulties • Coordination issues • Large or extraordinary debt • Potentially costly • Integration difficulties

• Inability to achieve synergy • Integration difficulties • Inadequate evaluation of target • Too much diversification • Inability to achieve synergy • Coordination issues

Understanding the Requirements of a Successful Acquisition Will Enable the Firm to Take Steps to Address Potential Problems

Potential Preventive Actions

• Understanding differences across countries / industries • Develop effective organization structure

• Thorough cost / benefit analysis • Understanding what and how to integrate the firms • Understand own strengths / weaknesses • Understanding what and how to integrate the firms

• Understand own competitive scope / focus • Identify sources of potential synergy and understand how to achieve them • Develop effective organization structure

* Sourced and adapted from Figure 7.1 of the Ireland / Hoskission / Hitt Textbook “The Management of Strategy, Concepts, Eighth Edition”

Acquisitions Should Be Evaluated Carefully To Avoid Potential Issues (II)

Reason For Acquisition

Increase market power Reshaping the firm’s competitive scope Learning and developing new capabilities

Potential Problems In Achieving Success

• Integration difficulties • Potentially costly • Inability to achieve synergy • Maintaining congruent strategy • Too much focus on acquisitions • Integration difficulties • Inability to achieve synergy

• Inadequate evaluation of target • Integration difficulties • Inability to achieve synergy

Understanding the Requirements of a Successful Acquisition Will Enable the Firm to Take Steps to Address Potential Problems

Potential Preventive Actions

• Careful selection / evaluation of target firm • Understanding what and how to integrate the firms

• Understanding the systematic steps required to achieve the firm’s strategy • Careful selection / evaluation of target firm(s) for portfolio development

• Understanding the new capabilities acquired and how to leverage them • Careful selection / evaluation of target firm

* Sourced and adapted from Table 7.1 of the Ireland / Hoskission / Hitt Textbook “The Management of Strategy, Concepts, Eighth Edition”

Successful Acquisitions Tend To Have Certain Characteristics

Understanding Acquisition Goals and Requirements Can Help Organizations Determine Key Characteristics / Attributes Desired

Attributes Acquired firm has assets or resources that are complementary to the acquiring firm’s core business Acquisition is friendly Acquiring firm conducts effective due diligence to select target firms and evaluate the target firm’s health Acquiring firm has financial slack Merged firm maintains low to moderate debt position Acquiring firm has sustained emphasis on R&D and innovation Acquiring firm manages change well and is flexible and adaptable

Results High probability of synergy and competitive advantage by maintaining strengths Faster and more effective integration and possibly lower premiums Firms with strongest complementarities are acquired and overpayment is avoided Financing is easier and less costly to obtain Lower financing cost, lower risk, and avoidance of trade-offs associated with higher debt Maintain long term competitive advantage of markets Faster and more effective integration facilitates achievement of synergy

* Taken from Figure 7.2 of the Ireland / Hoskission / Hitt Textbook “The Management of Strategy, Concepts, Eighth Edition”

Acquisition - Issues Operational: 1. Cultural 2. Coordination

• ‘Need for Global Integration’ • Organizational Structure

Financial: 1. Overvalued 2. Large debt Informational: 1. Synergistic failure

• Limited scope or scale benefits 2. Poor due diligence

• Decision based on insufficient information • Poor understanding of capabilities – (e.g., tacit

knowledge)