•Why acquisitions and alliances - To boost sales, profits and stock prices.
•American companies created a titanic wave - 74000 acquisitions and 57000 alliances from 1996 through 2001.
•Most of them fail.
•Acquisitions either destroy or don’t add to shareholders value.
•Alliances create little wealth for shareholders.
•Share prices fall between 0.34% and 1% within 10 days after announcing collaborations
-Strategic Management Journal.
Always compare the two strategies i.e. Alliance or Acquisition before picking one.
Companies generally take over firms that they should have collaborated with and ally with those, they should have bought. Thus making a mess of both acquisitions and alliances.
Companies must weigh the merits and demerits of both the above mentioned strategies before choosing horses for courses.
•Competitive•Based on Market Prices.•Risky•Motive - Increase sales or cut costs.
•Cooperative•Based on Negotiations. •Less Risky.•Motive – Entering into new markets, regions & customer segments.
Wrong Understanding regarding:
When to Ally & When to Acquire.
Coca Cola and P&G created a $4 billion joint venture in Feb,2001.
Agreement Terms -
a. Coke would transfer Minute Maid , Sonfil, Cappy, Qoo etc. to the new company and P&G would contribute two beverage brands- Punica,Sunny delight and Pringles chips.
b. Coke would tap P&G’s nutritional expertise to develop new drinks and P&G’s flagging brands would get a boost from Coke’s extensive distribution network.
Aim – The new venture would slash costs by $50 million.
a. Coke’s stock dropped by 6% and P& G’s Stock rose by 2%.
b. Investors wondered why Coke had agreed to share 50% of the profits from a fast growing segment with a weak rival & that too in its core business.
The alliance was terminated within 5 months.
Intel paid $1.6 billion in 1999 to buy the $131 million DSP Communications.
Motive:-. An opportunity to break into wireless communication market.
a. Intel’s stock prices fell by 11% within 3 days.
b. Investors were basically concerned about two factors i.e.
1. 40% premium that Intel paid for DSP’s shares.
2. People tend to leave high tech firms, when bigger companies absorb them.
c. Intel lost most of DSP's key people and its biggest wireless customer Kyocera.
Intel had to write off $600 million of goodwill by 2003.
RESOURCES & SYNERGIES
SYNERGIES•There are three types of synergies:Modular Synergies
•Require different levels of coordination between firms and result in different forms of collaboration.
•When they manage resources independently, pool only results for greater profits.•Modular synergies- independent resources generate them•Non equity alliances best suited to generate them.
•Examples:1. Airline and a hotel chain plan a collaboration.2. Hewlett Packard & Microsoft have created a non equity alliance that pools the company’s system integration and enterprise’s software skills respectively to create technology solutions.
•When one company completes its task and passes on the result to a partner to do its bit .•Resources are sequentially interdependent.•Partners sign rigid contract that they monitor carefully.•Enter into equity based alliances.
For instance:When a biotech firm that specializes in discovering new drugs say , Abgenix, wishes to work with a pharmaceutical giant say, AstraZeneca that is familiar with FDA approvals are seeking sequential synergies.
•By working closely together and executing task through an iterative knowledge sharing process.•Combine and customize resources to make them reciprocally interdependent.•Acquisitions are better than alliances for he companies that desire reciprocal synergies.
•For instance :Exxon and Mobil realized that they have to become more efficient in almost every art of the value chain, be it – research , oil exploration or marketing. Thus they decided to merge rather than pursuing an alliance.
Tata Steel Ltd acquired the entire ordinary share capital of Corus Group, London-based manufacturer steel products, for $11.917 in cash per share or a total value of 14.719 billion, after an extensive bidding war with CSN.
Synergies: As both Tata and Corus were in the same business, the synergies in collaboration would be reciprocal in nature. Thus, the framework points towards M&A.
Resources: The two were in the same business and a combination of resources would provide economies of scale along with increased capacity.
Risks and Uncertainty: In a commodity industry, demand is relatively stable. Hence uncertainty would tend to be on the low/moderate side.
Competition: Corus was a highly coveted company, and the keen interest of CSN in acquiring it created a scenario where acquisition was the only option.
OUR EVALUATION: The framework clearly points towards M&A from Tata’s perspective, where Tata probably made a mistake was the price that it paid for Corus. Corus was highly overvalued at 608 pence per share, when the ideal value should have been close to 525 pence (Source-UBS). Though Tata got it‘s strategy right, this enormous overvaluation should have been avoided.
CRITIQUEKnowing when to use which strategy may be a greater source of competitive advantage than knowing how to executee.g. Corning didn't know how to execute acquisition
It may so happen that organizations are unable to misjudge their own environment in terms of resources utilized, synergies required, degree of market uncertainties etc ; as these are of utmost importance to take a right decision
Flawed intentions of top management involved can neglect the factors which are important to be considered e.g. to boost executive ego or big bonus are there for big merger deals
Coping with a merger can make top managers spread their time too thinly that they happen to neglect their core business which may be spelling doom.