Strategic ChoiceStrategic options (1)

Acquisitions/mergers

William Meaney MBA BSc. ACMA 1

Strategic Choice Growth options

Porters

Generic

Strategies

Ansoff’s

Matrix

Acquisitions

MergerLicence

Franchise

Joint Ventures

Strategic Alliances

Divestment

Sub contracting

Contract Manufacture.

Outsourcing

MBO etc.

Suitable

Appropriate

Feasibility

Financial

Decisional

Models• Pro forma

accounts

• Capital budgeting

• Capital

Investment

appraisal

• NPV etc.

• Decision trees

• (EMV) Expected

Monetary Values

Basis Means Options

Generation of Options Evaluation of

optionsSelection of Strategy

Own and

control

Shared

ownership

and control

Have use of

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Learning outcomes

After completing this topic you should be able to

• Understand what Acquisition/mergers involve

• The benefits of acquisition and merger to the acquirer and the acquired

• The process involved

• Give some examples of acquisition/mergers

• Assess the financial and non financial benefits

• Understand some of the challenges in integrating organisations

William Meaney MBA BSc. ACMA 3

Acquisitions/Mergers

On completion of this topic you should be able to

• Have an understanding of the nature of mergers and acquisitions

• Be able to see the practical benefits from selection of recent mergers

• Be able to critically assess M&A as a growth strategy.

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Acquisition/mergers - what and why

• Acquisition –A transaction where one firm

buys another firm with the intent of more

effectively using a core competence by

making the acquired firm a subsidiary

within its portfolio of businesses

• Merger – A transaction where two firms

agree to integrate their operations on a

relatively coequal basis because they

have resources and capabilities that

together may create a stronger

competitive advantage

Reasons for Acquisition/merger

• Acquire additional capacity

• Synergy in purchasing

• Acquire management talent

• Enter new markets

• Increase market share

• Counter competition

• Asset stripping

• Acquire new technology

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Why are Mergers/Acquisitions popular?

Optimistic view of Mergers and Acquisitions

• Rapid means of corporate growth

• Creation of new synergies-economies of scale/scope

• Increased market share and market power

• Internalisation of crucial upstream or downstream

value chain activities

• Transfer of assets to more effective management

• Means of gaining new competencies/knowledge

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Selecting an Acquisition Target

Factors to consider

• Strategic objectives

• Shareholder value

• Acquisition objectives

• Performance criteria

• Company characteristics

• Management

• Industry sector dynamics

Large global mergers

• Kraft Foods and Cadbury

• Daimler and Chrysler

• AOL and Time Warner

• HP and Compaq

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The Process and the challenges

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Selecting an Acquisition Target

Performance criteria

Company characteristics

Management

Industry sector characteristics

• Return on capital employed

• Sales margins

• Sales growth

• Market share

• Net present values

• Size of company

• Geographical locations

• Product range, R&D etc..

Quality of the management

Management style

Compatibility between the firms

Stage of industry evolution

Competitive dynamics

William Meaney MBA BSc. ACMA 9

William Meaney MBA BSc. ACMA 10

Daimler/Chrysler: 'Marriage made in heaven’?

• Good strategic fit?

• Do synergies exist?

• What does each party bring to the merger?

• Was a merger needed to exploit these synergies?

• What potential problems with integration should they have foreseen?

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Example

• Kraft – Cadbury

• Benefits?

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Considerations prior to Merger/Acquisition

Non financial

• Good strategic fit

• ?

• ?

• ?

Financial

• ?

• ?

• ?

• ?

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But the researchers say……

• Strong evidence that at least half

of all M&As fail, and only a small

fraction are truly successful.

• A bad gamble: most M&A

transactions involve a premium of

35%-50%

• Synergies often fail to materialise

• Integration is rarely as smooth as

expected

• M&As make more sense when:

• Speed to market is crucial

• Industry growth is slow, making

increases in capacity undesirable

• Missing resources cannot be

developed internally

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But the researchers say……

• Fraction are truly successful.

• A bad gamble: most M&A transactions involve a premium of 35%-50%

• Synergies often fail to materialise

• Integration is rarely as smooth as expected

• Strong evidence that at least half of all M&As fail, and only a small

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Requirements to succeed

• Demonstrate a clear fit with your firm’s overall corporate strategy

• Be cautious and thorough in due diligence

– Guilty until proven innocent, not innocent until proven guilty.

– Begin thinking about integration before thinking about valuation.

• M&As are a poor substitute for innovation but well managed can

provide best of both worlds.

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How will this be useful in your exam?

• It may be a requirement to assess and integrate two organisation as a part of Q1

• Having knowledge of the process and the challenges will help develop a strategic perspective

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