Indian School of Business Corporate Development: Mergers, Acquisitions and Alliances

Term and Academic Year: 5, 2013-14 Instructor: Professor Naga Lakshmi Damaraju Contact Information: AC 8 Level 1, Room no: 8127

NagaLakshmi_Damaraju@isb.edu Extn: 7161

Office Hours: By appointment Dress Code for the class: Business Casual ------------------------------------------------------------------------------------------------------------ Special Note:

Please note that the final class day is November 15

th, 2013 (Friday) instead of Nov 14

th, 2013

(Thursday). There is no change in regular class timing.

________________________________________________________________________ Course Objectives Corporate Development: Vertical Integration, Diversification, M&A and Alliances

This course builds on CSTR, the core MBA strategy course. The primary topic of that course is business strategy, or the actions that firms take to gain competitive advantages in a single industry or market. The primary topic of this course is corporate strategy, or the actions that firms take to gain competitive advantages when operating in multiple markets or industries simultaneously. Examples of the corporate strategies we will discuss this term include vertical integration, strategic alliances, corporate diversification, mergers and acquisitions and divestments. The major educational objectives of this course are:

1. to understand the conditions under which different kinds of corporate strategy have the

potential to create economic value for firms;

2. to understand the organizational and managerial systems that must be in place in order to

realize this potential economic value; and In addition, the following learning goals are also accomplished through the course: a. Critical and Integrative Thinking

Each student shall be able to identify key issues in a business setting, develop a perspective that is supported with relevant information and integrative thinking, to draw and assess conclusions.

b. Effective Oral Communication

Each student shall be able to communicate verbally in an organized, clear, and persuasive manner, and be a responsive listener.

Assessment for these components is through the Group project, final exam and class participation, the details of which are in the evaluation section of this syllabus. Text Material The following text materials are required for the course:

(1) Barney, Jay B. (2002) Gaining and Sustaining Competitive Advantage, 4th Edition. Upper Saddle River, NJ: Prentice Hall. (Indian Edition available with Prentice Hall India)

(2) Case Packet

The book provides most of the theoretical and conceptual background needed to analyze the cases. Most class time will be taken up by discussions of the cases.

Evaluation and Grading* Student performance in the course will be evaluated and graded according to the following:

(1) Group Written Case Analysis #1 . . . . . . . . . . . . . . . . . . . . . . . . . 10%

(2) Group Written Case Analysis #2 . . . . . . . . . . . . . . . . . . . . . . . . . 10%

(3) Written Group Case Study and Theory Note . . . . . . . 30%

(Critical and Integrative Thinking)

(4) Final Exam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25%

(Critical and Integrative Thinking)

(5) Class Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25%

(Effective Oral Communication) *Honor Code prescriptions for the grading components will be on Learning Management System (LMS) Group Written Case Analyses

Students will be assigned to groups. Each group will be required to submit two Written Case Analyses during the term. Sessions 4-9 are eligible for these analyses. There will be limit on the number of groups that can analyze the same case in each section. Therefore, sign-up on day 1 with your preferences. A list of group memberships and a schedule of when these Written Case Analyses are due will be distributed at the beginning of the second class.

What Should Be Included in a Group Written Analysis? When writing these case analyses, groups

should adopt the role of an outside analyst. Imagine that your group works for an investment or consulting firm and that it has been given the assignment of evaluating the current state, and future potential, of the corporate strategies being pursued by the firm in the case. In preparing an analysis, your group should:

(1) identify the key corporate strategies being pursued by a firm;

(2) evaluate the effectiveness of these strategies;

(3) explain why these strategies are effective or ineffective; and

(4) recommend any changes that should be made to increase the effectiveness of these

strategies.

In addition, in many of the cases, the firm in question is contemplating, or has implemented, several specific strategic actions (e.g., an acquisition, a divestiture, a strategic alliance). In this situation, the written case analysis should also include an evaluation of these specific strategic actions and, where appropriate, recommendations should be made and justified.

Written Case Analysis Evaluation Criteria. Previous experience suggests several important

differences between excellent and mediocre written case analyses.

Excellent written analyses “tell a story” about a firm’s corporate strategies: What are the

fundamental economics of a firm’s corporate strategy? How are different parts of the strategy related? What are the longer term objectives of a firm’s investment in a corporate strategy? Excellent analyses justify each major point with reference to critical facts in the case. Ideas and concepts from lectures and the readings are incorporated into the discussion as appropriate and in a seamless way. The application of these ideas and concepts often leads to surprising, counter-intuitive analyses and recommendations. At the end of these excellent written analyses, the reader is absolutely convinced of the wisdom of any final recommendations.

Mediocre written analyses have few of these attributes. Instead of “telling a story” about a firm’s

corporate strategies, these analyses simply repeat the facts and assertions contained in the case. Critical facts in the case are ignored or not integrated into the paper. For example, these mediocre written analyses will often include a summary and cursory analysis of a firm’s profit and loss statement and its balance sheet, but will fail to discuss the strategic implications of these analyses. The authors of these reports often seem more interested in making sure that every theory or model mentioned by the professor in class or in the book is mentioned in the report rather than making sure that the report tells an integrated story about a firm’s corporate strategy. Often, the different parts of these mediocre analyses are not linked—almost as if different people wrote different sections, but no one took the time to bring these sections together, to discuss the implications of each section for other sections. These written analyses rarely generate any counter-intuitive or surprising analyses or recommendations. At the end of reading these reports, the reader is only convinced that, in fact, members of the group read the case. The reader is not convinced about the wisdom of any final recommendations. Certainly, just

answering the study questions associated with each case almost certainly dooms a written case analysis to mediocrity.

Length and Other Requirements. Written case analyses can be no longer than eight pages, double

spaced. Figures, tables, and exhibits can be included in an appendix to these analyses and are not counted against this page limit. Groups can draw on sources of information outside the case materials. However, when this is done, copies of this material must be included, as an appendix, to the written case analysis. Groups should not telephone or write to the companies that are in their assigned case studies.

Group papers are due at the beginning of the class during which the assigned case is discussed. No late papers will be accepted. Papers that are not turned in, or not turned in on time, will receive a zero. Unless ISB closes down, there will be no exception to this rule, so please plan accordingly.

Group Self-Evaluation Forms. In general, each member of the group will receive the same grade on

a written case analysis. However, there may be times when one or more members of a group will “free ride” on the work of other members. The grades of such free riders will be substantially reduced if consistent evidence of free riding is found. To discover free riding, each member of a group may submit an individual Group Self-Evaluation Form around the time when the group’s paper is submitted. This can be done during class or after class. An example Group Self-Evaluation Form is included with this syllabus. If someone does not submit a Group Self-Evaluation Form, I will assume that, from this student’s perspective, at least, no free riding problems existed. Written Group Case Study and Theory Note

There will also be a Written Group Case Study and Theory Note assignment, using the same groups that write the Group Written Case Analyses. However, where the Group Written Cases focus on analyzing cases written by others and chosen by me, the Written Group Case Study and Theory Note assignment focuses on developing and analyzing a new case study.

By the end of the fourth class, each group will submit a one paragraph description of the company about which you will write a case and the potential issues to be examined in that case. The written case will identify current corporate strategy issues which the company is facing and will allow the reader to identify those issues and formulate an action plan.

In addition to the written case, each group will write a Theory Note which explicitly articulates the theoretical models you used to develop your recommendations for management action for the issues developed in the case. Length and Other Requirements

The two parts of the assignment will contribute toward the total project grade in the following manner:

Written Case 60 points Written “Theory Note” 40 points

Case Project Total 100 points

The written case reports should be double spaced. Cases will generally be between fifteen and twenty-five double-spaced pages, not including the cover page, figures, graphs, references, and other supplementary materials. Appropriate references must be included in the form of endnotes. Cases are due, without exception, on the date scheduled. When you turn your Group Written Case Study in, submit one hard copy in class and one electronic copy to my academic associate assistant via e-mail. Send the e-mail to the academic associate indicating your group number and case name in the subject heading. Late assignments will not be accepted. A first draft of the case and theory note is due mid-way through the term. You need only submit a hard copy of the first draft. I will provide detailed feedback on your progress at that time. Drafts should also include appropriate endnotes. Instances of plagiarism are taken extremely seriously and will be dealt with within ISB’s prescribed methods to handle honor violations. Evaluation Criteria The following criteria will be used to evaluate case studies. Group Written Case Study:

• Relevant information presented in a comprehensive and unbiased fashion

• Accurate information

• Appropriate sources/citations

• Well-written

• Appropriate structure and flow

• Selected appropriate scope for firm issues

• Present competitive data, company history and/or additional data and supporting documentation where needed

• Relevant data and issues clearly identified (or embedded in the case) for the reader to identify Theory Note

• Have you clearly identified and articulated the relevant theoretical underpinnings for your oral case

analysis and recommendations?

• Have you described how to apply the relevant theoretical tools?

• Have you clearly articulated the teaching purpose of your case?

• Can the reader also identify the relevant theoretical points from the material presented in the case?

Each group’s work should be conducted specifically for this course. For example, groups should not use case analyses prepared for other classes as the basis of this assignment. I also expect every factual assertion in a case to be well documented with appropriate endnotes.

Group Self-Evaluation Forms As with the Written Group Analysis, each member of the group

will receive the same grade for this assignment. However, there may be times when one or more members of a group will “free ride” on the work of other members. The grades of such free riders will be substantially reduced if consistent evidence of free riding is found. To discover free

riding, each member of a group may submit an individual Group Self-Evaluation Form around the time when the group’s paper is submitted. This can be done during class or after class. An example Group Self-Evaluation Form is included with this syllabus. If someone does not submit a Group Self-Evaluation Form, I will assume that, from this student’s perspective, at least, no free riding problems existed. Class Participation

There are three components of the class participation grade: student responses to core case analysis questions, overall peer evaluation, and my overall evaluation.

Student Answers to Core Case Analysis Questions. The Socratic method will be used to organize

case discussions. For each case discussed during the term, I will have a list of six or seven critical questions that are at the core of analyzing this case. These critical questions may or may not be the same as the study questions that are provided for each case. Before class starts, I will have randomly chosen students to answer each one of these critical questions. When I call on a student, that student has three options:

(1) Answer the question. In answering the question, the student presents his/her analysis of this

aspect of the case. It may be that the student does not agree that the question asked is an important question. If this is so, a discussion about what constitutes an important question is entirely appropriate.

(2) Pass. Each student has the opportunity, one time during the term, to pass on answering a

question. We all have complex lives, and this opportunity acknowledges that complexity. However, you can only pass once. If you are absent (unexcused absence) from class when you are called on, it is counted as a Pass. If you pass a second time (either by attending class and answering “Pass” when called on or by not attending class [unexcused absence] when you are called on) your class participation grade will be adjusted down.

(3) Fake it. If a student has not read and analyzed the case, he/she may try to bluff through the

questioning. Faking may appear to be a particularly attractive alternative if a student has read, but not analyzed, the case. However, faking it is a very risky strategy. If I determine that a student is faking it, that student’s class participation grade will suffer accordingly.

I take notes on student answers to these questions. By the end of the term, I hope to have called on every one in class to answer at least one of these core case analysis questions.

Of course, students who are not asked core case analysis questions for a particular case are free to volunteer their insights and analyses to the ongoing discussion. The quality of this volunteer participation is the primary determinant of a student’s overall peer evaluation and my overall evaluation of class participation.

Overall Peer Evaluations. In the last class, I will distribute a Peer Class Participation Evaluation

form. A copy of this Peer Evaluation form is attached to this syllabus. On this form, students will be asked to list up to eight people in the class who, in their opinion, consistently demonstrated excellent class participation throughout the term. Students may not list themselves on this form. For accounting purposes, each student will need to sign their Peer Class Participation Evaluation form, although student evaluations will be kept confidential. The Peer

Class Participation Evaluation form must be returned to me no later than the end of class. Students who fail to turn this form in on time cannot receive the highest class participation grade.

Overall Professor Evaluations I will make my own independent and subjective evaluation

of class participation throughout the term.

Class Participation Evaluation Criteria. The following criteria are used to evaluate class

participation. For students answering core case analysis questions, these criteria are:

Excellent class participation: a student’s answer shows that the student understands the

importance of the question, understands how this question relates to other questions that have been and will be asked about the case, demonstrates that the student has read and thought deeply about the case, and shows that the student can develop creative and innovative insights through this analytic effort. Excellent answers to core case analysis questions can be the basis of class discussion for 30 minutes or more.

Good class participation: a student’s answer shows that the student understands the

question, has read and thought about the case, and that the student can generate insights from this analysis. The main difference between excellent and good answers to core case analysis questions is found in the depth and sophistication of the analysis.

Poor class participation: a student’s answer shows that the student has either not read the

case, or read it without any analysis.

For the Overall Peer and Overall Professor evaluations of class participation, the following criteria will be used to evaluate class participation:

Excellent class participation: student consistently attends class, consistently contributes to

case discussions and occasionally contributes unusually insightful comments in these discussions.

Good class participation: student consistently attends class and consistently and

appropriately contributes to case discussions.

Poor class participation: student attends class inconsistently, inconsistently but

appropriately contributes to case discussion, or consistently contributes to case discussion in inappropriate ways.

Examples of inappropriate contributions to case discussion include, but are not limited to, comments that fail to move the discussion along, comments that demonstrate shallow thinking about the case, and efforts to dominate a case discussion.

Determination of Class Participation Grade: The final class participation grade is

determined by combining the Core Case Analysis Questions evaluation, the Overall Peer evaluation, and the Overall Professor evaluation as follows:

(1) 100 points: students who receive excellent evaluations on at least two of these

measures of class participation

(2) 80 points: students who receive excellent evaluations on only one of these measures of class participation

(3) 70 points or less: students who do not receive excellent evaluations on any of

these measures of class participation Group Self-Evaluation Form

You have 100 group participation points to allocate to members of your group. If you believe that each member of your group participated equally in this group project, then you should assign each member of the group the same number of points. If one or more members of the group did not contribute equally, you should assign fewer points to them and more points to members of the group who contributed more to this project. In any case, the total number of points you allocate to members of your group must sum to 100. PLEASE PRINT NEATLY.

1Your Name: ___________________________________________________________________

2. Name of the Case: ___________________________________________________________

3. List the names of the people in your group (besides yourself), and the group participation points you would assign to each. Remember, total Group Participation Points must sum to 100.

Members of Your Group Group Participation Points

1. _______________________________________ __________

2. _______________________________________ __________

3. _______________________________________ __________

4. _______________________________________ __________

5. _______________________________________ __________

6. _______________________________________ __________

7. _______________________________________ __________

100 points Peer Class Participation Evaluation Form Your name: ______________________________________________________________________ (Print)

Please list up to eight people in the course who, in your opinion, demonstrated consistent excellent class participation throughout the quarter. Do not list your own name. Please sign your name at the bottom of this form.

As a reminder, excellent class participation is defined as: a student consistently attends class, consistently and appropriately contributes to case discussions, and occasionally contributes unusually insightful comments in these discussions. Please print legibly!

1. _______________________________________

2. _______________________________________

3. _______________________________________

4. _______________________________________

5. _______________________________________

6. _______________________________________

7. _______________________________________

8. _______________________________________

_____________________________________________ Sign here

Attendance policy: Attendance & Punctuality Learning is an interactive process. ISB students are admitted partly based on the experiences they bring to the learning community and what they can add to class discussions. Therefore attendance is an important aspect of studying here. You have to be present in all the classes. Absence is only appropriate in cases of extreme personal illness, injury, or close family bereavement. Voluntary activities such as job interviews, business school competitions, travel plans, joyous family occasions, etc. are never valid reasons for missing any class. The faculty with the assistance of the Academic Associate will keep track of your attendance and decide on the nature and extent of penalty for any absence from the class. Penalty may include reduction in grade. Late arrival is disruptive to the learning environment; so you have to be in class before the scheduled time. Most courses meet twice a week during the day. Normally there are no classes scheduled on Friday or in the evenings, but there are exceptions. Class and Exam schedules are posted on the PGP intranet site. Any change in the class schedule is notified in advance. Many professors choose to base part of the course grade on class participation, which may include an attendance component. If you find it necessary to miss a class or make a late submission, you must seek permission from the instructor in advance. In case of illness, the professor may also require a letter of confirmation from a qualified doctor.

Session-wise Details

Session 1:

Transactions Case: Crown Equipment Other:Student Groups Costs and Corp.: Design Services Strategy Announced Vertical Integration (9-991-031) Other: Group Written Readings: Case Analysis Distributed

1. Barney, Chapter 10 2. Market Failures (HBS 700127) 3. David Collis, “The Scope of the Corporation,” HBS note 795-

139. Case Study Questions Crown Equipment: Design Services Strategy

1. Evaluate the relationship between Crown Equipment and Richardson Smith.

2. Based on this evaluation, should this relationship be modified? If yes, how? If not, why not?

Session 2: Capabilities Case: Pennzoil Co. And Vertical (9-390-131)

Integration Reading: C.K. Prahalad and Gary Hamel (1989), “The Core Competence of the Corporation,” Harvard Business Review

Case Study Questions Pennzoil Company

1. Should Pennzoil buy Jiffy Lube? If yes, why? If no, why not?

Session 3:

Real Options Case: Nucleon, Inc. And Vertical (9-692-041) Integration

Reading: Barney, Chapter 8 Case Study Questions Nucleon, Inc.

1. Should Nucleon build a pilot plant to produce enough CRP-1 for Phase I/II testing? Session 4: Session 4: Vertical Integration and Cellulosa Arauco: Forward Integration or

Diversification Horizontal Expansion? (9-705-474)

Reading: Barney, Chapter 10 & 11 Case Study Questions Arauco

1. Should Arauco build the Nueva Aldea project? 2. What are the sources of Arauco’s competitive advantage?

3. Should Arauco own both forests and pulp production facilities? Does the Alto Parana project

help you answer this question? 4. Do you think there is a better alternative to investing in a pulp plant?

Session 5: Diversification and Case: Newell Co.: Corporate Leveraging Core Strategy Competencies (9-799-139)

Readings: 1. Barney Chapter 14 2. Bower, Joseph (2001), “Not All M&As are alike: and That

Matters,” Harvard Business Review (#R0103F)

Case Study Questions Newell Company: Corporate Strategy

1. Historically, what has Newell’s core competence been? 2. Will this core competence create value in Newell’s acquisition of Calphalon? 3. Will this core competence create value in Newell’s acquisition of Rubbermaid?

Session 6: Implementing Case: Tyco International (A) Diversification (9-798-061) And Management Reading: Barney, Chapter 12 Controls Case Study Questions Tyco International

1. What is Tyco’s corporate strategy? 2. How does it implement this strategy? 3. Tyco’s problems since the publication of this case are well known. Were the seeds of those

problems part of Tyco at the time of the case? If yes, what were they? If no, why did things go so badly at Tyco?

Session 7: Implementing Case: Cooper Industries’ Diversification Corporate Strategy (A) And Shared Activities (9-391-095)

Reading: David Collis and Cynthia Montgomery (1998), “Creating Corporate Advantage,” Harvard Business Review. 98303.

Case Study Questions Cooper Industries: Corporate Strategy (A)

1. What is Cooper’s corporate strategy? 2. How does it implement this strategy? 3. Is Cooper different than Tyco? If yes, how? If no, is Cooper headed for the same kinds of

problems that Tyco experienced?

Session 8: Implementing Case: Sunrise Medical, Inc.’s Diversification Wheelchair Products And Resolving (9-794-069) Divisional Conflicts Case Study Questions Sunrise Medical, Inc. Wheelchair Products

1. What is Sunrise’s corporate strategy? 2. What is Quickie’s business strategy? 3. Why does Guardian want to introduce a light weight standard wheelchair? 4. Should Sunrise let Guardian introduce this chair? Why or why not?

Session 9: Diversification Case: Alliance Management at Forbes Marshall (ISB case) and Alliances

Reading: 1. Jeffrey Dyer, Prashant Kale and Harbir Singh. (2004). “When to ally and when to acquire?” Harvard Business Review Article R0407H

2. Barney Chapter 13 Session 10: Corporate Growth—Strategy in Action Case: Live Case--KNMH

This case study will be distributed two weeks in advance and the case study questions will be given along with the case.

Final Exam

The Nature and Purpose of the Final Exam. There is a final exam in this class. This exam will focus

on evaluating the ability of students to understand and apply the concepts and models presented in class lectures and in the book. This exam will consist of four Wall Street Journal articles. Students will choose two of these articles to analyze. Analyses should use concepts and models presented in class lectures and in the book. Each article will have four or five questions associated with it. Students can use these questions to organize their analysis of an article, or they can develop their own approach to analysis. The exams are open book and open note. An example exam question is attached to this syllabus.

Exam Evaluation Criteria. The following criteria are used to evaluate exam questions:

Excellent exam answers demonstrate both a student’s understanding of the theories and models discussed in class and in the book and a student’s ability to apply these theories and models to generate insights about real business situations facing firms.

Good exam answers demonstrate either that a student understands the theories and models or that a student can generate insights about a real business situation facing firms, but not both.

Poor exam answers demonstrate neither a student’s understanding of the theories and models nor a student’s ability to generate insights about real business situations facing firms.

If students have questions about how their exam is graded they can ask for a re-grade. However, I do not re-grade individual questions. I only re-grade the entire exam. The final grade for the re-graded exam may be greater than, less than, or equal to the original grade.

Example Final Exam Question Langreth, R. (2000) “Behind Pfizer’s Takeover Battle: An Urgent Need,”

Wall Street Journal, Tuesday, February 8, pg. B1 +.

Please read and analyze the attached article. You may find it helpful to consider the following in your analysis.

1. The article suggests that one reason Pfizer wanted to buy Warner-Lambert is that some of Pfizer’s once promising new drugs were having significant development and performance problems. In this sense, Pfizer’s acquisition of Warner-Lambert could be thought of as an alternative to Pfizer’s further investment in research and development. In your view, is there anything about Pfizer’s acquisition strategy that suggests it will earn a higher rate of return on its acquisition of new drugs through buying Warner-Lambert than it would earn on its development of new drugs through internal research and development?

2. The article also suggests that another reason Pfizer wanted to buy Warner-Lambert is that these two firms already had a co-marketing agreement to sell Lipitor, and that this agreement was being threatened by a potential takeover of Warner-Lambert by American Home Products. Lipitor has sales of over $4 billion a year, and is among the most profitable drugs ever developed. Is there anything about Pfizer’s acquisition strategy that suggests that it will earn an above normal return from buying Warner-Lambert, thereby not only retaining its co-marketing agreement to sell Liptor, but extending that agreement to gain 100% of Liptor’s sales and profits?

3. On October 27, Mr. De Vink (CEO at Warner Lambert) and Mr. Steere (CEO at Pfizer) met. Mr. De Vink did not tell Mr. Steere that Warner Lambert was having serious merger discussions with American Home Products. This was deceptive. Mr. Steere told Mr. De Vink that Pfizer was having serious discussions about acquiring another pharmaceutical firm (not Warner Lambert). This was an outright lie. Was De Vink’s prevarication consistent with the interests of Warner Lambert’s stockholders? Why or why not? Was Steere’s prevarication consistent with the interests of Pfizer stockholders? Why or why not?

4. Was Warner-Lambert’s decision to engage in merger talks with Proctor and Gamble at the same time it was engaging in merger talks with Pfizer consistent or inconsistent with the interests of Warner-Lambert’s stockholders? Why?

5. Was Pfizer’s decision to pay American Home Products a $1.8 billion breakup fee consistent or inconsistent with the interests of Pfizer’s stockholders? Why? Please write your answer legibly on the bottom and the back of this page only.

Learning Management System (LMS) Relevant materials will be posted on LMS