Creating Value Through External Collaboration Mergers and Acquisitions Dr. George H. Webster Combinations of Means and Forms of Diversification Time

Creating Value Through External Collaboration

Mergers and Acquisitions Dr. George H. Webster

Combinations of Means and Forms of Diversification

Time Inc. acquires Warner Communication, creating a vertically integrated entertainment business.

ACQUISITIONS

Cetus,a leading firm in the biotechnology field, teams up with larger corporations which provide needed capital.

Humana develops a full line of health care services, vertically integrating across businesses.

STRATEGICALLIANCES

INTERNALDEVELOPMENT

Phillip Morris buys Miller Brewing to diversify out of the cigarette business.

Dow Chemical and Corning Glass create joint venture, more profitable than either parent.

3M generates more than 25% of revenues from newly developed products. (5 years)

VERTICAL HORIZONTAL CONCENTRIC

Forms

Mea

ns

Chevron is in talks to buy Texaco for $42 Billion

Lockheed to develop a new satellite system to promote growth.

Pfizer and Genentech formed an alliance to market Genentech’s new drug


Mergers and Acquisitions


Financial Transactions

• Operating changes

• New controlling shareholder

• New board of directors

• Change in business strategy


Who Buys?

• An operating company

• A group of managers

• A group of financial investors


Objective

To increase the per-share value of the acquirer

• Long term• Discounted cash flows


Merger and Acquisition Types

• Horizontal

• Vertical

• Congeneric

• Conglomerate


Valuation of an Acquisition Candidate


Value to Parties to the Transaction

• Value to Buyer– Discounted present value of cash flows

– Value represents maximum price

• Value to Seller– Similar discounted cash flow analysis

– Value may be lower for seller

Merger AnalysisPRE-MERGER P&L

REVENUES $40000

LESS: EXPENSES 20000

PROFIT BEFORE TAX 20000

LESS: TAX 10000

PROFIT AFTER TAX $10000

POST-MERGER P&L

REVENUES $50000

LESS: EXPENSES 15000

PROFIT BEFORE TAX 35000

LESS: TAX 17500

PROFIT AFTER TAX $17500

The acquired firm is worth more to the acquirer than it is to the market.

The acquire is willing to pay a premium over market.

The price is usually a multiple of earnings. ( 10X earnings for example)

The acquirer would pay $175,000 for the acquiree.

First Union- CoreStatesFirst Union- CoreStates•Takeover was a $19.7 Billion deal

•CoreStates 1997 net income - $830 million

•First Union forecast $258 Million savings in after tax expenses from synergy

•In 1998 FUC missed goal by $50 Million

•Payback period is about 18 years- Does this make sense?

•Why else spend that much money?

Expand into the Northeast

Capture CoreStates investment banking business

Position itself to merge with another large bank (Chase Manhattan)

The Ford-Volvo MergerThe Ford-Volvo Merger

•Bought Volvo’s Car Business for $6 billion

•Worldwide sales now 7.2 million units

•Ford will achieve three goals; boost market share, fill a hole in the lineup, gain momentum in battle with G.M.

•Volvo forecasts 200,000 units sold in U.S. by 2001

•Ford will now compete in the $30,000-$40,000 range

•Analysts see only six major players by 2010

CLASS EXERCISE

Georgia-Pacific acquired Unisource, a full line paper distributor, for $1.2 Billion

Wal-Mart made a cash offer to buy a British Supermarket chain to position themselves in Europe

Pharmacia Upjohn agreed to buy Sugen, a California biotech firm for $728 Million.

Lockheed, TRW, and Telecom Italia will begin to develop their $3.5 Billion Astrolink Global satellite system.

France’s Aerosatiale and Lockheed are in talks to develop military surveillance and refueling aircraft.

Time Warner is joining forces with Advance Publications to create a new TV network for women.

Thomson Multimedia is expected to unveil a portable device that plays music files from the internet.

Seagram’s Universal Music is planning to begin selling digital music on the internet

Boeing will develop its own high capacity satellite system and services.


Combinations of Means and Forms of Diversification

ACQUISITIONS

STRATEGICALLIANCES

INTERNALDEVELOPMENT

VERTICAL HORIZONTAL CONCENTRIC

Forms

Mea

ns

Georgia-Pacific acquired Unisource, a full line paper distributor, for $1.2 Billion

Wal-Mart made a cash offer to buy a British Supermarket chain to position themselves in Europe

Pharmacia Upjohn agreed to buy Sugen, a California biotech firm for $728 Million.

Lockheed, TRW, and Telecom Italia will begin to develop their $3.5 Billion Astrolink Global satellite system.

France’s Aerosatiale and Lockheed are in talks to develop military surveillance and refueling aircraft.

Time Warner is joining forces with Advance Publications to create a new TV network for women.

Thomson Multimedia is expected to unveil a portable device that plays music files from the internet.

Seagram’s Universal Music is planning to begin selling digital music on the internet

Boeing will develop its own high capacity satellite system and services.

STRATEGY IN ACTION- AMETEK

Ametek Inc, Paoli PA, makes devices that measure physical properties- temperature and pressure gauges, motors, sensors, and tank gauges, for example.

“The objective is to double the size of the company in five years.”

The Three Part Strategy Acquisitions- Adding to existing businesses directly or adjacent

product lines to existing businesses. (Fastest method of growth)

Internal Development- create more products through R&D.

Penetrate New Markets- The company will concentrate on increasing international sales.

Strategic Allinaces Dr. George H. Webster

Strategic AlliancesStrategic AlliancesAn Alternative to Mergers

and Acquisitions

Strategic Alliances Dr. George H. Webster

Creating Value Through Strategic Alliances

• Mergers and alliances are not substitutes for each other

• For each situation there is a best structure


Global Logic of Strategic Alliances

• National identity of products has disappeared - markets not defined by geographic borders

• Dispersion of technology

• The importance of fixed costs

Strategies for Entering Foreign Markets

None Low High

Ownership and Control of Foreign Operations

High

Low

None

Lev

el o

f in

vest

men

t at

Ris

k

Typical D

irecti

on of Evolutio

n

Exporting

Licensing

Franchising

Joint Venture

Subsidiary


Advantages and Disadvantages of Different Entry Modes

Exporting

Entry Mode Advantages Disadvantages

Ability to realize locationand experience-curve economies

High transport costsTrade barriersProblems with localmarketing agents

Licensing Low development costs andrisks.

Lack of control overtechnologyInability to realize location and experience curve economiesInability to engage in global strategic coordination

Franchising Low development costs andrisks

Lack of control over qualityInability to engage in globalstrategic coordination


Advantages and Disadvantages of Different Entry Modes

Entry Mode Advantages Disadvantages

Joint Ventures Access to local partner’s knowledgeSharing development costs and risksPolitical acceptability

Lack of control over technologyInability to engage in global strategic coordinationInability to realize location and experience economies

Wholly ownedsubsidiaries

Protection of technologyAbility to engage in global strategic coordinationAbility to realize location and experience economies

High costs and risks


• The potential for merger synergy is greatest where both partners have significant overlapping geographic positions. Important sources of synergy are:– Consolidation on a national basis

– Improving skills transfers across borders

• By contrast strong overlapping geographic markets frequently suggest trouble for strategic alliances



• Keys to success in alliances are complementary activities and well-matched functional strengths

• Keys to success in M.&A. are often overlapping activities and skills

• In cross-border M.&A. much of the value is based on sharing skills, products and customers across national borders

Advantages of Global Strategic Alliances

• Facilitates entry into a foreign market• Share costs and risks associated with

development of new products or processes• Bring together complementary skills and

assets that neither company could easily develop on its own

• Might help the company set technological standards for its industry


Disadvantages of Global Strategic Alliances

• Give competitors a low cost route to gain new technology and market access


Choosing Partners

• Alliance partners should be complementary in products, geographic presence or functional skills they bring to venture

• Complementarity between technology partners

Increasingattractiveness of

strategic alliances

Leapfroggenerationof producttechnology

Speednew productintroduction

Developupstreamtechnology

Achievemarketpenetration

Increasecapacityutilization

Fillproductlinegaps

Exploiteconomiesof scale

Building newbusinesses/introducingnew products

Improvingeconomics ofexistingbusinesses

Shorterproductlife-cycles

Increasingdevelopmentcost

Globalization Increasingcost pressure

High-Tech Alliances Driven by Economic Factors


Final Thoughts on Strategic Alliances

• Expanding existing businesses into new geographic regions

• Acquisitions successful in building core business in existing geographic market

• Alliances work well for moving into new businesses


Final Thoughts on Strategic Alliances

• Equal strength partners more likely to be successful

• Autonomy and flexibility

• Issue of ownership should be separated from managerial control

• Realize that joint venture fill intermediate-term needs but may mortgage long-term global future

Pirelli-Cooper- a Strategic Pirelli-Cooper- a Strategic Alliance ExampleAlliance Example

•Pirelli designated Cooper as exclusive distributor of Pirelli tires in N. A.

•Cooper supplies tires for the replacement market

•Cooper needs a major brand to complement its own

•Pirelli gives Cooper a “ tier one” product (meets O.E.M. standards)

•Cooper can now supply a complete line of tires

•Pirelli will use Cooper’s strong dealer relationships in U.S.

““Let’s Make a Deal”- A Let’s Make a Deal”- A Proposed Strategic AllianceProposed Strategic Alliance

•General Electric’s contribution:

G.E. will invest $500 million to develop an enlarged version of the GE90 (777)

The engine will have a 5,000-pound thrust margin over the competition

G.E. Capital will finance 747 sales, either through lease or sale in Asia

•Boeing’s contribution:

Boeing must proceed to develop the 777 (by 2003)

Cost of development will be at least $1 Billion

Boeing must make G.E. the sole engine supplier

““Let’s Make a Deal”- A Let’s Make a Deal”- A Proposed Strategic AllianceProposed Strategic Alliance

•General Electric receives:

$20 Billion contract from Boeing

Engine sales for 20 years

Approximately 20 per cent return on 747 sales/lease

•Boeing receives:

Exclusive use of an engine that which will make the 777 competitive with the Airbus A340

Financing help with the sale of 747’s (critical in Asia)

Documents

Creating Value Through External Collaboration Mergers and Acquisitions Dr. George H. Webster Combinations of Means and Forms of Diversification Time