SM Lecture Eight - Mergers, Acquisitions and Alliances

Strategic Management BUSM 3200

These Lecture Slides summarize the key points covered in the respective chapters in your

recommended text; these slides do NOT substitute, at all, the required reading of the assigned

chapter from the text. These slides also may contain additional supplementary material extracted

from other texts and sources outside your text book.

1-1 BUSM 3200- Strategic Management (Jan 2013) GDS

Learning outcomes

Establish the potential role of organic (‘do it yourself’) strategies.

Identify key issues in the successful management of mergers and acquisitions.

Identify the key issues in the successful management of strategic alliances.

Determine the appropriate choices between organic development, mergers and acquisitions and strategic alliances.

Compare key success factors in mergers, acquisitions and alliances.


Three Strategy Methods

Figure 10.1 Three strategy methods


Organic development

Organic development is where a strategy is pursued by building on and developing an organisation’s own capabilities. This is essentially the ‘do it yourself’ method.


Advantages of organic development

Knowledge and learning can be enhanced.

Spreading investment over time – easier to finance.

No availability constraints – no need to search for suitable partners or acquisition targets.

Strategic independence – less need to make compromises or accept strategic constraints.


Corporate entrepreneurship

Corporate entrepreneurship refers to radical change in the organisation’s business, driven principally by the organisation’s own capabilities.

For example, Amazon’s development of Kindle using its own in house development .


Mergers and acquisitions

A merger is the combination of two previously separate organisations, typically as more or less equal partners.

An acquisition involves one firm taking over the ownership (‘equity’) of another, hence the alternative term ‘takeover’.


Strategic motives for M&A

Strategic motives can be categorised in three ways:

Extension – of scope in terms of geography, products or markets.

Consolidation – increasing scale, efficiency and market power.

Capabilities – enhancing technological know-how (or other competences).


Financial motives for M&A

There are three main financial motives:

Financial efficiency – a company with a strong balance sheet (cash rich) may acquire/merge with a company with a weak balance sheet (high debt).

Tax efficiency – reducing the combined tax burden.

Asset stripping or unbundling – selling off bits of the acquired company to maximise asset values.


Managerial motives for M&A

M&A may serve managerial self-interest for two reasons:

Personal ambition – financial incentives tied to short-term growth or share-price targets; boosting personal reputations; giving friends and colleagues greater responsibility or better jobs.

Bandwagon effects – managers may be branded as conservative if they don’t follow a M&A trend; shareholder pressure to merge or acquire; the company may itself become a takeover target.


Target choice in M&A

Two main criteria apply:

Strategic fit – does the target firm strengthen or complement the acquiring firm’s strategy? (N.B. It is easy to over-estimate this potential synergy).

Organisational fit – is there a match between the management practices, cultural practices and staff characteristics of the target and the acquiring firm?


6–12 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Strategic Outcomes for Horizontal Mergers and Acquisitions

♦ Increasing the firm‟s scale of operations and

market share.

♦ Expanding a firm‟s geographic coverage.

♦ Extending the firm‟s business into new product

categories.

♦ Gaining quick access to new technologies or

complementary resources and capabilities.

♦ Leading the convergence of industries whose

boundaries are being blurred by changing

technologies and new market opportunities.

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Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results

♦ Strategic Issues:

● Cost savings may prove smaller than expected.

● Gains in competitive capabilities take longer to realize or

never materialize at all.

♦ Organizational Issues

● Corporate cultures, operating systems and management

styles fail to mesh due to resistance to change from

organization members.

● Loss of key employees at the acquired firm.

● The managers overseeing the integration make mistakes

in melding the acquired firm into their own.

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Valuation in M&A

Getting the offer price correct is essential:

Offer the target too little, and the bid will be unsuccessful.

Pay too much and the acquisition is unlikely to make a profit net of the original acquisition price. (‘the winner’s curse’).

Acquirers do not simply pay the current market value of the target, but also pay a ‘premium for control’.


Integration in M&A

Figure 10.2 Acquisition integration matrix Source: P. Haspeslagh and D. Jemison, Managing Acquisitions, Free Press, 1991


Integration in M&A

Approaches to integration:

Absorption – strong strategic interdependence and little need for organisational autonomy. Rapid adjustment of the acquired company’s strategies, culture and systems.

Preservation – little interdependence and a high need for autonomy. Old strategies, cultures and systems can be continued much as before.

Symbiosis – strong strategic interdependence, but a high need for autonomy. Both the acquired firm and acquiring firm learn and adopt the best qualities from each other.

Holding – a residual category – with little to gain by integration. The acquisition will be ‘held’ temporarily before being sold on, so the acquired unit is left largely alone.


Strategic alliances

A strategic alliance is where two or more organisations share resources and activities to pursue a strategy.

Collective strategy is about how the whole network of alliances of which an organisation is a member competes against rival networks of alliances.

Collaborative advantage is about managing alliances better than competitors.


Types of strategic alliance

There are two main kinds of ownership in strategic alliances:

Equity alliances involve the creation of a new entity that is owned separately by the partners involved.

Non-equity alliances are typically looser, without the commitment implied by ownership.


Equity alliances

The most common form of equity alliance is the joint venture, where two organisations remain independent but set up a new organisation jointly owned by the parents.

A consortium alliance involves several partners setting up a venture together.


Non-equity alliances

Non-equity alliances are often based on contracts.

Three common forms of non-equity alliance:

Franchising.

Licensing.

Long-term subcontracting.



Benefits of Strategic Alliances and Partnerships

♦ Minimizes the problems associated with vertical

integration, outsourcing, and mergers and acquisitions.

♦ Useful in extending to extend the scope of operations

via international expansion and diversification strategies.

♦ Reduces the need to be independent and self-sufficient

when strengthening the firm‟s competitive position.

♦ Offers greater flexibility should a firm‟s resource

requirements or goals change over time.

♦ Are useful when industries are experiencing high-

velocity technological advances simultaneously.

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Reasons for Entering into Strategic Alliances

♦ When seeking global market leadership:

● Enter into critical country markets quickly.

● Gain inside knowledge about unfamiliar markets and cultures

through alliances with local partners.

● Provide access to valuable skills and competencies

concentrated in particular geographic locations.

♦ When staking out a strong industry position:

● Establish a stronger beachhead in target industry.

● Master new technologies and build expertise and

competencies.

● Open up broader opportunities in the target industry.

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Capturing the Benefits of Strategic Alliances

Picking a good

partner

Being sensitive

to cultural

differences Recognizing that

the alliance must

benefit both sides

Adjusting the

agreement over

time to fit new

circumstances Structuring the

decision-making

process for swift

actions

Ensuring both

parties keep their

commitments

Strategic

Alliance Factors

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Factors That Make an Alliance “Strategic”

♦ It helps build, sustain, or enhance a core

competence or competitive advantage.

♦ It helps block a competitive threat.

♦ It increases the bargaining power of alliance

members over suppliers or buyers.

♦ It helps open up important new market

opportunities.

♦ It mitigates a significant risk to a firm‟s business.

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Motives for alliances

Scale alliances – lower costs, more bargaining power and sharing risks.

Access alliances – partners provide needed capabilities (e.g. distribution outlets or licenses to brands)

Complementary alliances – bringing together complementary strengths to offset the other partner’s weaknesses.

Collusive alliances – to increase market power. Usually kept secret to evade competition regulations.


Strategic alliance motives

Figure 10.3 Strategic alliance motives


Strategic alliance processes

Two themes are vital to success in alliances:

Co-evolution – the need for flexibility and change as the environment, competition and strategies of the partners evolve.

Trust – partners need to behave in a trustworthy fashion throughout the alliance.


Alliance evolution

Figure 10.4 Alliance evolution Source: Adapted from E. Murray and J. Mahon (1993), „Strategic alliances: gateway to the new Europe‟, Long Range Planning, vol. 26, p. 109. www.sciencedirect.com/science/journal



The Drawbacks of Strategic Alliances and Partnerships

♦ Culture clash and integration problems due to different

management styles and business practices.

♦ Anticipated gains do not materialize due to an overly

optimistic view of the synergies or a poor fit of partners‟

resources and capabilities.

♦ Risk of becoming dependent on partner firms for

essential expertise and capabilities.

♦ Protection of proprietary technologies, knowledge

bases, or trade secrets from partners who are rivals.

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Principle Advantages of Strategic Alliances

♦ They lower investment costs and risks for each

partner by facilitating resource pooling and risk

sharing.

♦ They are more flexible organizational forms and

allow for a more adaptive response to changing

conditions.

♦ They are more rapidly deployed—a critical

factor when speed is of the essence.

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Strategic Alliances Versus Outsourcing

♦ Key Advantages of Strategic Alliances:

● The increased ability to exercise control

over the partners‟ activities.

● A greater commitment and willingness of

the partners to make relationship-specific

investments as opposed to arm‟s-length

outsourcing transactions.

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How to Make Strategic Alliances Work

♦ Create a system for managing the alliance.

♦ Build trusting relationships with partners.

♦ Set up safeguards to protect from the threat

of opportunism by partners.

♦ Make commitments to partners and see that

partners do the same.

♦ Make learning a routine part of the

management process.

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Comparing acquisitions, alliances and organic development

Figure 10.5 Buy, ally or DIY matrix


Comparing acquisitions, alliances and organic development

Four key factors in choosing the method of strategy development :

Urgency – internal development may be too slow, alliances can accelerate the process but acquisitions are quickest.

Uncertainty – an alliance means risks are shared and thus a failure does not mean the full cost is lost.

Type of capabilities – acquisitions work best with ‘hard’ resources (e.g. production units) rather than ‘soft’ resources (e.g. people). Culture clash is the big issue.

Modularity of capabilities – if the needed capabilities can be clearly separated from the rest of the organisation an alliance may be best.


Key success factors

Figure 10.6 Key success factors in mergers, acquisitions and alliances


Summary (1)

There are three broad methods for pursuing strategy: mergers and acquisitions, strategic alliances and organic development.

Organic development can be either continuous or radical. Radical organic development is termed corporate entrepreneurship.

Acquisitions can be hostile or friendly. Motives for mergers and acquisitions can be strategic, financial or managerial.


Summary (2)

The acquisition process includes target choice, valuation and integration.

Strategic alliances can be equity or non-equity. Key motives for strategic alliances include scale, access, complementarity and collusion.

The strategic alliance process relies on co-evolution and trust.

The choice between acquisition, alliance and organic methods is influenced by four key factors: urgency, uncertainty, type of capabilities and modularity of capabilities.


PRACTICE ESSAY QUESTIONS

IMPORTANT NOTE: →

These questions are provided for your reference only – they are only INDICATIVE of the standard of questions you might expect in the final exam.

DO NOT use these questions to “spot”

The RMIT examiner will post advice on the exam on the Learning Hub closer to the exam; you are required to pay attention to that advise

The questions here show the range of topics that could be tested from this lecture; they are NOT exhaustive

To score a high grade it is important to LINK the theory to applications and examples. Where from?

You have been assigned specific cases to read from the text. Each case study will show you the kinds of strategic decisions the case company needs to make. You can draw from these examples.

You have selected a case company for your project; you may use examples from there.

You are supposed to read widely from the business press about local, regional and international companies strategies. You can use examples from there as well.

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BUSM 3200- Strategic Management (Jan 2013) GDS

Sample essay question

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1. Discuss the main catalysts for diversification. Examine the risks and advantages of joint ventures, mergers and strategic alliances using examples from two of the cases studied during this course.

2. Mergers and acquisitions (M&A) is an important method for strategy development. In the case of SABMiller’s proposed acquisition of Foster’s, discuss the major motive for SABMiller and elaborate how well Foster’s may fit SABMiller strategically and organisationally.


Sample essay question

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3. What are the differences in a merger, joint venture and strategic alliance? What are the advantages and risks of each of these diversification strategies? Give examples from the XYZ case study to support your answer.

XYZ : this means that you may be asked to comment on one or more of the assigned cases that are identified in your course schedule.


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SM Lecture Eight - Mergers, Acquisitions and Alliances