M A R C U S

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved MERGERS, ACQUISITIONS AND DIVESTITURES

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-3 Chapter Learning Objectives  Understanding the difference between business and corporate strategy.  Being cognizant of the different forms of firm organization including horizontal and vertical integration.  Being aware of the reasons there has been so much merger, acquisition, and divestiture activity.  Understanding the motivations for this activity, the outcomes of this activity, and what can be learned from it.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-4 Chapter Learning Objectives (Continued)  Realizing how such factors as deregulation have speeded up the pace of this activity.  Becoming acquainted with portfolio management techniques such as the BCG matrix and the GE/McKinsey model.  Examining vertical integration.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-5 Firm Options to Expand or Narrow Scope  It can do so through internal ventures and development  It can partner with and form alliances with other firms, for example, by means of joint ventures  It can acquire or merge with other firms that have the resources, capabilities, and competencies it needs  It can eliminate some areas by divesting, liquidating, selling, or disposing of them

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-6 Conglomerate Vertical Related Product MOVES Horizontal Dominant Product Ex. 5.1 Expanding the Scope of the Firm: Five Choices

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-7 Ex. 5.2 The Main Tasks of Corporate Strategy Determine the scope of the firm. Decide what business or businesses to be in. * Should the portfolio be broad or narrow? Horizontal, dominant product, related product, vertical, or conglomerate * What merger, acquisition, and divestiture (MAD) strategy should be adopted? Create cohesiveness and direction among the assembled pieces. Allocate resources to the different businesses Help formulate their business strategies Coordinate their activities Control their performance

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-8 Motivations Behind M&As  To expand  To avoid or halt decline  To cut costs  To bring about turnarounds

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-9 Motivations Behind M&As (Continued)  To gain access to products and technologies  To gain production or distribution capabilities  To increase earnings per share

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex. 5.5 Railroad Industry’s Major Players, 1999 CompanyTotal Track Routes (miles) Revenues ($ billions) Burlington Northern Santa Fe Union Pacific CSX Norfolk Southern Canadian National 33,500 33,400 23,000 21,600 17, * 6.6* * Union Pacific and CSX have nonrail subsidiaries that contribute to revenues Source: H. Sun, “The Sources of Railroad Merger Games,” The Transportation Journal 39,, no. 4.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex. 5.6 Banking Industry Deposits (in $ billions)

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Why Do M&As Fail?  Price too high  Products or services less than expected  Lack of marketing leverage  Few benefits for the overlapping of core competencies

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Why Do M&As Fail? (Continued)  Cultural problems  Unfriendly mergers and acquisitions  Failure to retain key personnel  Failure to achieve a turnaround

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Key Issues For an Acquisition to Succeed 1.Does the acquirer’s management team know enough about the acquired company’s businesses to completely run them? 2.Are the businesses of the acquired company more attractive than the businesses in which the acquiring company is engaged? 3.Are the costs of entry so high that they will destroy the added income the acquiring company hopes to gain? 4.Is it possible to establish synergies between the new and old businesses?

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Sources of Synergy 1.Sharing of tangible resources (research labs, distribution systems) across multiple businesses 2.Sharing of intangible resources (brands, technology) across multiple businesses 3.Transferring functional capabilities (marketing, product development) across multiple businesses 4.Applying general management capabilities to multiple businesses

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex. 5.8 Top Management’s Role: Theory and Practice In TheoryIn Practice Creates value Acquires new businesses Restructures inefficiently managed businesses Transfers skills and capabilities to divisions Establishes linkages Determines logic of integration Is often in conflict with divisions over strategic and operational issues May try to impose uniformity despite advantages of differences May be pushed to limit by complex systems for managing interrelationships

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Management’s Corporate Strategy Roles 1.Expansion 2.The M-Form 3.Portfolio Management 4.Contraction

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex. 5.9 SWOT Analysis QUESTION MARKS Selectively hold and increase STARS hold and increase CASH COWS hold and maintain DOGS harvest and divest HighLow High Internal Strengths and Weaknesses External Opportunities and Threats

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex GE/McKinsey Model: Evaluation Criteria

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex Vertical Integration: Entertainment Industry ResourcesCreationDeliveryRetail Actors Writers TV production Movie production Broadcast TV networks Cable TV networks Movie distribution Local affiliates Local cable cos. Local theaters Content Distribution

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex Vertical Integration at Disney